The European Central Bank (ECB) has identified notable deficiencies in the ability of EU banks to effectively manage their exposure to climate-related risks.
In its inaugural comprehensive evaluation of how European banks are adapting to climate and environmental considerations, the ECB found that none of the 112 banks surveyed met the supervisory expectations set forth.
Approximately half of the banks assessed believe that climate and environmental risks will significantly affect their risk profiles in the next three to five years, particularly impacting credit, operational, and business model risks. Alarmingly, all banks that claimed to have no exposure to these risks exhibited serious deficiencies in their risk assessments.
While banks have taken steps to align with ECB expectations concerning governance, risk appetite, and operational risk management, they continue to fall short in critical areas such as internal reporting, market and liquidity risk management, and stress testing. For instance, half of the banks lack actionable plans to integrate climate and environmental risks into their business strategies, and less than 20% have established key risk indicators for monitoring.
Nearly all banks are working on enhancing their practices, but the ECB notes significant variability in the quality of these plans, with progress being unacceptably slow. “Only one-third of banks have developed plans that are at least broadly adequate, and half are unlikely to finalize their implementation by the end of 2022,” the central bank reports.
The ECB has sent individual feedback to banks, urging them to rectify their deficiencies, which will ultimately influence their Pillar 2 capital requirements.
Looking ahead, the ECB plans to conduct a thorough review of banks’ preparedness for managing climate and environmental risks. This review will include in-depth evaluations of their strategies, governance, and risk management frameworks, scheduled for the first half of 2022, in conjunction with the ECB’s supervisory stress test on climate-related risks. Banks can expect a request for information towards the end of 2021.