Following extensive consultation, the European Central Bank (ECB) has published its comprehensive guide on climate-related and environmental risks for banks, outlining how it expects the banks that it supervises to manage and disclose climate and environmental risks under current prudential rules.
However, a complementary assessment report published at the same time found that banks were “lagging behind” on their climate-related risk reporting, with just 3% of banks making fully comprehensive disclosures.
Referencing the Paris Agreement, UN Sustainable Development Goals, European Green Deal and EU Commission action plan on financing sustainable growth, the ECB makes clear that the financial sector is expected to play a key role in making Europe climate-neutral by 2050. Banks are expected to perform a self-assessment on the ECB’s expectations in early 2021, and there will be a supervisory stress test in 2022 also focusing on climate-related risks.
Despite these expectations, the guidelines are not binding for banking institutions, instead serving merely as a “basis for supervisory dialogue”. The ECB will fully review banks’ practices in relation to climate and environmental risk in 2022.
Largely aligned with the Task Force on Climate-related Financial Disclosures recommendations, the ECB’s new guidelines for banks are comprehensive but remain only guidelines. The weakness in the climate risk disclosure of banks outlined in the accompanying assessment report is therefore not surprising, and it is difficult to see substantive improvement while full and comprehensive disclosure remains optional.
The ECB has indicated that it will review its risk management practices in its ongoing strategic review expected to be published in 2021, offering the potential to strengthen prudential banking supervision and turn optional guidelines and “expectations” into regulation.
This page was last updated April 23, 2021
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