ECB to Step Up Action on Climate Risk at Banks as a Top Priority
The European Central Bank (ECB) unveiled its top supervisory priorities for 2023 – 2025 on Monday, setting “stepping up efforts to address climate change” as one of its key focus areas for its supervision banks.
The ECB sets its supervisory priorities annually to determine its forward three-year focus, based on its determination of the main vulnerabilities and risks faced by banks, in order to supervise banks effectively and consistently, and to clarify its expectations from banks.
In addition to the stepped up climate focus, the ECB’s top priorities included strengthening banks’ resilience to immediate macro-financial and geopolitical shocks, and ensuring that banks address digitalisation effectively and strengthen their management bodies’ steering capabilities.
The ECB’s planned increased climate focus follows its release in July of the results of its climate stress test, which it said indicated that banks urgently need to accelerate the incorporation of climate risk into their risk management frameworks, and that banks remain heavily exposed to emissions-intensive industries.
Last month, the ECB published a thematic review into banks’ climate risk-related strategies and their governance and risk management frameworks last month, with findings that many banks have put basic practices in place, but most lack sophisticated methodologies and granular information on climate and environmental risks, and that nearly all banks have blind spots in identifying the breadth and magnitude of these risks.
In the ECB’s discussion of its 2023 – 2025 priorities published on its website, the ECB called the need for banks to address the challenges and opportunities of climate transition as “becoming urgent,” and said that it no longer regards climate change risks as long-term or emerging.
To address vulnerabilities to material exposure to physical and transition risk drivers, the ECB’s priorities included the following strategic objective:
“Banks should adequately incorporate climate-related and environmental (C&E) risks within their business strategy and their governance and risk management frameworks in order to mitigate and disclose such risks, aligning their practices with current regulatory requirements and supervisory expectations.”
The ECB also outined a series of planned activities as part of its climate risk priorities, including performing targeted deep dives to follow up on identified shortcomings from the climate stress test and thematic review, reviews of banks’ compliance with climate risk disclosure requirements, deep dives on reputational and litigation risk related to banks’ climate and environmental strategies and risks, preparatory work to review banks’ transition planning capabilities and ESG readiness under upcoming regulatory mandates, as well as on-site inspections (OSIs) on climate-related aspects.
In an ECB podcast released following the publication of the central bank priorities, Supervisory Board Member Kerstin af Jochnick said:
“We have carried out a climate risk stress test in the summer, and we have done a thematic review of how banks are doing in incorporating climate and environmental risks in their operations and strategies. We saw that banks are making progress in incorporating these risks into their business operations and risk management, but there is still a long way to go before they are in line with what we expect as supervisors.”
Click here to view the ECB’s 2023 – 2025 supervisory priorities.