The European Central Bank (ECB) has published the results of its thematic review, which has shown that banks are ‘still far’ from managing climate risks.
The ECB is now establishing staggered deadlines for banks to progressively meet all the supervisory expectations it laid out in its guide on climate-related and environmental risks in 2020.
In addition, the ECB also published a compendium of good practices observed in some banks, demonstrating that swift progress is possible and aiming to facilitate the improvement of practices across the sector.
The thematic review aimed to check whether banks identified and manage climate risks and environmental risks adequately. It also delved into banks’ risk strategies and their governance and risk management processes.
The review concluded that even if 85% of banks now have in place at least basic practices in most areas, many are still lacking more sophisticated methodologies and granular information on climate and environmental risks.
The ECB said there is also supervisory concern related to the execution capabilities of most banks, where effective implementation of their practices is still lagging behind. As a result, banks continue to significantly underestimate the breadth and magnitude of such risks, and almost all banks – 96% – have blind spots in identifying them.
To deal with this, the ECB has set institution-specific deadlines for achieving full alignment with its expectations by the end of 2024. In a first step, the ECB expects banks to adequately categorise climate and environmental risks and to conduct a full assessment of their impact on the banks’ activities by March 2023 at the latest.
Secondly, and by the end of 2023 at the latest – the ECB expects banks to include climate and environmental risks in their governance, strategy and risk management. In a final step, by the end of 2024 banks are expected to meet all remaining supervisory expectations on climate and environmental risks outlined in 2020, including full integration in the Internal Capital Adequacy Assessment Process (ICAAP) and stress testing.
The ECB has recently published its plans on how it intends to decarbonise corporate bond holdings in its monetary policy portfolio.
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