In November 2020 the ECB published the “Guide on climate-related and environmental risks” appealing on institutions to take a strategic, forward-looking and comprehensive approach in considering climate-related and environmental risks.
In the Guide the ECB set out 13 supervisory expectations for banks when formulating and implementing their business strategy, governance and risk management frameworks, and to become more transparent by enhancing their C&E risk disclosures.
It was clear that the efforts of supervisors to ensure banks address risks stemming from climate change and environmental degradation would continue.
Therefore, in 2021, in the first ever exercise of its kind, the ECB comprehensively assessed the state of C&E risk management in the banking sector asking 112 significant institutions to conduct a self-assessment of their practices related to the 13 supervisory expectations and to submit implementation plans detailing how and when they would bring their practices in line with the Guide. Since then, the ECB has performed several assessments on these practices and monitored the progress made in order to identify shortcomings on an institution-by-institution basis.
With the aim of further enhancing banks capacity to assess, quantify climate-related risks, in January 2022 the ECB launched the first bottom-up Climate Stress Test (CST) exercise. This initiative should be seen as a joint learning activity - for supervisors, for banks, and for the financial industry as whole – carried out to enhance understanding of all the relevant players in the financial industry1 about the importance of C&R risks and to strengthen supervised banks’ efforts to modelling climate risk and integrating it into existing models.
The 2022 CST results have helped competent authorities in assessing institutions’ preparedness to meet the supervisory expectations regarding climate risk management and practices. The other most relevant targeted action of the 2022 Supervisory Roadmap on C&E risks, the Thematic Review, is intended to serve similar purpose.
In the first half of 2022, along with the CST exercise, ECB has conducted the Thematic Review on C&E risks, which consists of a comprehensive deep dive into banks’ practices related to strategy, governance and risk management in the context of climate-related risks.
After setting-up dedicated meetings with institutions, the ECB is going to provide them with final feedback letters summarising the supervisory observations. The 2022 ECB C&E risks agenda will be completed with a final report on C&E risks published later this year.