ECB publishes report on climate and environmental risk management – Finance and Banking

In a new report, the European Central Bank (“ECB”) Underline “good practices” in managing climate and environmental (“C&E”) risks in the banking sector. The ECB asked 112 institutions to perform a self-assessment of their current practices against 13 supervisory expectations and to provide an implementation plan to address these risks.

Among its findings, the ECB observed good practices of institutions, ranging from “strategy definition procedures to specific qualitative and quantitative indicators in risk appetite statements, and from materiality assessments to credit risk management “. The least significant progress was in internal reporting, liquidity risk management and stress testing; the ECB noted that none of the 112 institutions were on the verge of fully aligning their practices with the stated expectations. Substantial progress has been made mainly by large institutions; however, almost all institutions assessed have developed implementation plans to address C&E risks.

In its report, the ECB highlighted several “good practices” to be taken into account by institutions. Some of these practices include:

• using “dual materiality” assessments, where institutions consider both financial materiality and environmental materiality;




• C&E risk management through qualitative statements and quantitative indicators;




• integrating C&E risks into reporting practices;




• include M&E criteria in sector and investment policies; and




• perform stress tests using a defined baseline to assess physical and transient risks.

The ECB concluded that (i) although institutions have started to make progress, it is still slow; (ii) the ECB recognizes the challenges associated with integrating C&E risks into “strategies, governance and risk management arrangements
[that] are constantly evolving”; and (iii) the ECB expects all institutions to take “decisive action to address deficiencies” identified in the supervisory feedback letter.

Remark

The ECB report may offer a harbinger of what U.S. institutions could expect as the Fed, FDIC and OCC integrate assessment of climate-related financial risk management by the institutions. However, for U.S. institutions, guidance on managing climate-related financial risks is more likely to take the form of principles-based guidance rather than rules-based guidance.

Primary sources

1. European Central Bank report: The state of climate and environmental risk management in the banking sector

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