ECB calls on banks to improve climate risk disclosures

A recent assessment by the European Central Bank (ECB) on the progress European banks are making in disclosure climate risks has revealed a lot more is yet to be done on this front.

According to the ECB, although improvements have been seen since its first assessment in late 2020, no bank has yet met the full supervisory expectations. With regulation of climate and environmental risk disclosures set to become stricter in the coming years, banks will need to adjust their practices without delay.

The updated assessment covered 109 directly supervised banks and focused predominantly on disclosures at the highest level of consolidation.

Compared with 2020, more banks are now disclosing meaningful information on climate and environmental risks. As an example, more than 70% – compared to 50% in 2020 – assessed banks now explain how their board oversees said risks.

Despite this, the transparency level still remains insufficient. Approximately 75% of banks still do not disclose whether climate and environmental risks have a material impact on their risk profile, even though around half of banks that fail to do so have indicated to the ECB that they view themselves as exposed to such risks. In addition, almost 60% of banks in the sample do not describe how transition risk or physical risk could impact their strategy.

In another worrying finding in the study, banks’ disclosure of key metrics was found not to be sufficiently in line with supervisory expectations, with only around 50% publishing key performance or risk indicators on climate and environmental risks. Meanwhile, only 15% disclosed Scope 3 financed emissions, which cover the emissions that occur along the entire value chain of business activities.

Many banks have been found to be not sufficiently substantiating their climate and environmental risk disclosures. As an example, almost 30% of the banks that have committed to aligning their exposures with the Paris Agreement have not provided any information to back this up.

ECB supervisors, however, identified good practices that banks are using. For example, the ECB found one bank aiming for net zero emissions in its portfolio by 2050 has published several interim targets and the progress made towards them, as well as underlying methodologies and scenarios.

The ECB has sent individual feedback letters to banks explaining their shortcomings and how it expects them to take decisive action. The central bank will review banks’ climate and environmental disclosures again at the end of this year.

The ECB is also carrying out several climate-related supervisory activities this year, such as its first ever climate risk stress test and a thematic review on how banks incorporate climate and environmental risks into its regular supervisory methodology.

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