The European Central Bank (ECB) announced today the publication of its “Supervisory assessment of institutions’ climate related and environmental risks disclosures,” a new report assessing the progress of European banks on disclosing climate and environmental risks. The report indicated that while banks are making some improvements on disclosing climate risks, the level of transparency provided is still insufficient, with no bank fully meeting supervisory expectations.
In a speech today discussing the report’s findings, Frank Elderson, ECB Vice-Chair of the Supervisory Board, said that “banks can and must do much better to improve the quality of their disclosures, and they need to do it quickly.”
According to the report, approximately three-quarters of banks fail to disclose whether climate and environmental risks have a material impact on their risk profile, even as many of these have indicated to the ECB that they view themselves as exposed to these risks. Additionally, nearly 60% of banks do not describe how transition risk or physical risk could affect their strategy. Approximately half of the banks publish key performance or risk indicators on climate and environmental risks, and most of the banks that have committed to align exposures with Paris Agreement goals have not comprehensively substantiated these commitments in their disclosures. Additionally, only 15% disclose scope 3 financed emissions, which typically account for the vast majority of banks’ climate footprint.
The report did note some improvement over the most recent prior assessment in 2020, with roughly 70% of banks now providing information about climate and environmental risk governance and board oversight, compared to approximately 50% before.
Elderson highlighted the need for banks to rapidly improve transparency on climate and environmental risks, given the growing pressure from investors and other stakeholders, and particularly as they face imminent disclosure requirements from regulators and lawmakers.
“Recent regulatory and legislative initiatives reflect growing international awareness of the great value of transparent disclosures on C&E risks. In Europe, large banks will have to disclose climate-related information under the European Banking Authority’s comprehensive implementing technical standards. They will have to already do so by early 2023, referencing data from the end of 2022. The information requested from banks includes qualitative and quantitative information on environmental, social and governance risks, as well as indicators such as alignment metrics and the green asset ratio – thus significantly raising the bar in terms of C&E risk reporting. In the same vein, sustainability reporting obligations under the European Commission’s Corporate Sustainability Reporting Directive will shortly apply to large corporations, including banks under our direct supervision.”
Following up on the assessment, the ECB has sent individual feedback letters to each bank under its supervision highlighting the gaps in their disclosures, and expressing the ECB’s expectations to take action on remedying them. Elderson said that the ECB will assess banks’ climate and environmental disclosure again at the end of 2022, with expectations of significant progress.
“As I mentioned, the consequences of non-compliance with minimum transparency standards are only going to increase for banks, as legal and reputational risks are starting to materialise for banks which fail to step up the quality of their disclosures. More and more, clients, investors and other market participants want meaningful, comprehensive information on the climate-related actions of their banks. That way, they can make conscious, informed decisions about where their money goes.”
Click here to access the ECB assessment report.