Eurozone banks failing to meet climate expectations

November 23, 2021|Written by Graham Caswell|European Central Bank

An assessment of the climate and environmental risk management of major European banks by the European Central Bank (ECB) has found that none are close to meeting supervisory expectations outlined last year. While almost all banks have developed plans to improve their practices, the study found that only one-third of these plans “are even broadly adequate”.

The assessment found that half of the banks examined do not yet have concrete plans to integrate climate and environmental risks into their business strategies, while less than one-fifth have developed key risk indicators to monitor. Few institutions have introduced environmental risk practices that affect their strategy and risk profile, the report said, while most have a “blind spot” for physical risks and environmental risk drivers such as biodiversity loss and pollution.

The report also found that most banks assessing climate and environmental risks expect them to have a material impact on their risk profile in the next three to five years with credit, operational and business model risk most affected. However, banks that said they are not exposed to climate-related financial risks were also found to have “significant shortcomings” in their assessment of those risks.

“Banks have made efforts to meet ECB expectations regarding management bodies, risk appetite and operational risk management,” the ECB said in a statement accompanying the report’s publication. “However, they lag behind in areas such as internal reporting, market and liquidity risk management, and stress testing.”

ECB executive board member Frank Elderson commented on the report’s findings, calling on banks to “proceed more forcefully” in assessing and managing their climate and environmental risks. “Inability to manage climate and environmental risk poses a serious prudential risk to the stability of euro area banks and the banking sector as whole,” he said in a blog post published yesterday. “Acting now is the prudential thing to do.”

The representative study of 112 large banks comes just months before the ECB is due to begin stress testing all significant Eurozone banks for climate risks. ECB banking supervisors are also currently examining banks’ climate and environmental risk disclosures, with findings to be published in the first quarter of 2022.

This page was last updated November 23, 2021

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