On 18 October 2021, the European Central Bank (ECB) published a letter that it had sent to CEOs of significant institutions providing them with information on participation in the 2022 ECB Climate Risk Stress Test.
In the letter the ECB explains that the output of the stress test exercise will be integrated into the Supervisory Review and Evaluation Process (SREP) using a qualitative approach. The ECB explains that no direct capital impact via the Pillar 2 Guidance is envisaged although a possible impact of the exercise will be indirect, via the SREP scores on Pillar 2 requirements. The letter goes on to describe the three distinct modules that the stress test will comprise of:
- An overarching questionnaire to assess how banks are building their climate change stress test capabilities for use as a risk management tool.
- A peer benchmark analysis to compare banks across a common set of climate risk metrics.
- A bottom up stress test targeting transition and physical risks.
All institutions who received the ECB’s letter have been selected to participate in one or more of the modules, dependant on the size of the bank with a Methodical Note for the 2022 CST attached to the letter.
Alongside this, the ECB will carry out a Thematic Review of banks’ climate-related and environmental risk management practices and will include these results in the SREP.