Despite improvements, banks still need to identify better and manage climate and environmental risks. ECB sets deadlines for banks to meet all supervisory expectations by the end of 2024, progressively
FREMONT, CA: Banks continue to fall well short of managing environmental and climate risks adequately, according to a report from the European Central Bank (ECB). For banks to gradually achieve all the regulatory requirements outlined in its Guide on climate-related and environmental risks in 2020, the ECB is now setting staggered deadlines. The ECB also issued a compilation of good practices witnessed in several banks to encourage practice change across the industry and show that quick improvements are achievable. The ECB also issued a compilation of good practices witnessed in several banks.
The goal of the themed review was to determine if banks appropriately identify and manage environmental risks like biodiversity loss and climate concerns. It also included banks' governance and risk management procedures and risk strategies.
Even though 85 per cent of banks have at least fundamental procedures in place in the majority of cases, the evaluation found that they still lacked advanced techniques and detailed data on climate and environmental risks. The execution capabilities of most banks, where the efficient application of their processes is still lacking, are another area of supervisory concern. Banks continue to vastly underestimate the scope and gravity of such threats as a result, and 96 per cent of banks have trouble seeing them.
By the end of 2024, the ECB expects each institution to be completely in line with its expectations. Although there may be exceptions in particular circumstances, the ECB has made it clear that it expects banks to at least attain the following benchmarks. By March 2023 at the latest, the ECB anticipates banks to have properly classified environmental and climatic risks and completed a thorough evaluation of their impact on the bank's operations.
The ECB anticipates that banks would include the climate and environmental risks into their governance, strategy, and risk management in a subsequent step, and at the latest, by the end of 2023.
Some banks have already commenced to engage with their clients and make plans for the shift to a low-carbon economy. However, the majority of banks continue to take a wait-and-see attitude. To meet their long-term strategic commitments, banks, for instance, do not establish intermediate targets or restrictions to their risk-taking or set them in a way that has a minimal immediate influence on the bank's business.
Finally, by the end of 2024, banks must fully integrate into the Internal Capital Adequacy Assessment Process (ICAAP) and comply with all other supervisory requirements for climate and environmental risks outlined in 2020.
The deadlines will be closely watched, and enforcement action will be taken if necessary. In the Supervisory Review and Evaluation Process, supervisors already take climatic and environmental findings particular to banks into account (SREP). In its annual SREP, the ECB put binding qualitative requirements on more than 30 banks. Additionally, the results of the 2022 supervisory exercises on climate and environmental risks affected the SREP scores of a small number of institutions. These affect their Pillar 2 capital needs.
