Climate-related and environmental risks and the corresponding challenges will have important consequences to various aspects of our lives. Banks are expected to play a major role in for instance financing the transition to a sustainable economy and society.
In November 2020 the European Central Bank (ECB) published supervisory expectations towards the European banking sector: the ECB’s Guide on climate-related and environmental risks provides an overview of 13 recommendations related to Strategy, Governance, Risk management and Disclosures, and banks are expected to fully comply with them. Since then, an increasing number of national regulators and supervisors have also formulated similar expectations.
Gap Analysis and implementation plans:
Assessing your current practices, formulating and implementing action plans to remediate any shortcomings identified in the ECB Thematic review.
Materiality assessment and risk identification:
Identifying material risk exposures on different time horizons, and developing climate-related and environmental risk assessment guides / ESG assessment guides.
Proxy methodologies:
Developing and implementing proxy methodologies to close existing data gaps: from purely expert-based proxies to quantitatively well-underpinned methods.
Mapping to traditional prudential risks:
Mapping climate-related and environmental risk drivers (both transition and physical) to traditional prudential risk categories such as credit risk and market risk.
Key Risk Indicators (KRIs):
Translating transition and physical pathways into impacts on risk parameters and KRIs in order to monitor and actively manage the corresponding risks.
Risk appetite and risk profile, ICAAP, capital adequacy and disclosures:
Assessing short, medium and long-term impacts on your risk profile, and integration into your risk appetite, risk profile assessment, Pillar 2 processes and disclosures.
Christophe Caers is a Senior Consultant based in Finalyse Brussels with experience in climate risk management. He has been involved in the validation of the 2022 ECB climate stress test methodology at a large Belgian bank and the assessment of ESG scorecards. Christophe is a certified Financial Risk Manager (FRM) and holder of the GARP’s Sustainability and Climate Risk (SCR) certificate.
Milenko Petkovic is a Senior Consultant with more than 9 years of experience in risk management. Milenko’s area of expertise lies within the development and validation of credit risk models, ESG scorecards and climate risk stress testing, including transition and physical risks. Milenko is an active member of Finalyse Climate Risk Centre of Excellence and GARP’s Sustainability and Climate Risk (SCR) candidate.
Veronica Mazza is a Senior Consultant with more than 4 years of experience in credit risk management. She has been involved in the development of the 2022 ECB Climate Stress Test for a large European Bank, including both the physical and transitional risk exercises. She is currently working on the design of the Physical Risk assessment within the Finalyse Climate Risk Centre of Excellence.
Alexandre Synadino is a consultant with expertise in risk data analytics, climate risk management and regulatory reporting. He is an active member of the Finalyse Climate Risk Centre. His main area of expertise lies in the research, design and development of physical risk assessments using different tools and methods. Alexandre is involved in the conceptualisation of measurement approaches to cover multiple hazard types, geographies and scenarios to respond to regulatory demands for granular and forward-looking analyses.
Due to the unique features of environmental risks, extensive work is underway at the European and international levels to assess the extent to which they require urgent regulatory measures in addition to already existing frameworks. This article provides an overview of the microprudential framework’s most relevant shortcomings and their potential remediations. Its focus is on Pillar 1 aspects, addressing only the risk types most relevant from materiality viewpoint: credit, market and operational risks.
ReadIn recent years, the ECB has launched targeted actions to include climate and environmental risks in its ongoing supervision and has indicated addressing them in its list of priorities for 2022-2024. This article aims to go through the most relevant steps of the 2022 ECB supervisory C&E agenda and leverages on the results of the 2022 ECB climate stress test to provide preliminary commentary regarding banks’ preparedness for the existing and upcoming requirements.
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