On 27 November 2020, the European Central Bank (ECB) published its final and amended guide on climate-related and environmental risks following a public consultation. The guide outlines the ECB’s understanding of the safe and prudent management of climate-related and environmental risks under the current prudential framework. It describes how the ECB expects institutions to consider climate-related and environmental risks – as drivers of categories of risk – when formulating and implementing their business strategy and governance and risk management frameworks. It further explains how the ECB expects institutions to become more transparent by enhancing their climate-related and environmental disclosures.

The guide is not binding on institutions, but rather it serves as a basis for supervisory dialogue. As part of this supervisory dialogue, the ECB will discuss with institutions the ECB’s expectations set out in the guide in terms of any possible divergences in institutions’ practices. The ECB will continue to develop its supervisory approach to managing and disclosing climate-related and environmental risks over time, taking into account regulatory developments, as well as evolving practices in the industry and in the supervisory community.

In summary, the ECB’s supervisory expectations are:

• Institutions are expected to understand the impact of climate-related and environmental risks on the business environment in which they operate, in the short, medium and long term, in order to be able to make informed strategic and business decisions.
• When determining and implementing their business strategy, institutions are expected to integrate climate-related and environmental risks that impact their business environment in the short, medium or long term.
• The management body is expected to consider climate-related and environmental risks when developing the institution’s overall business strategy, business objectives and risk management framework, and to exercise effective oversight of climate-related and environmental risks.
• Institutions are expected to explicitly include climate-related and environmental risks in their risk appetite framework.
• Institutions are expected to assign responsibility for the management of climate-related and environmental risks within the organisational structure in accordance with the three lines of defence model.
• For the purposes of internal reporting, institutions are expected to report aggregated risk data that reflect their exposures to climate-related and environmental risks with a view to enabling the management body and relevant sub-committees to make informed decisions.
• Institutions are expected to incorporate climate-related and environmental risks as drivers of existing risk categories into their existing risk management framework, with a view to managing, monitoring and mitigating these over a sufficiently long-term horizon, and to review their arrangements on a regular basis. Institutions are expected to identify and quantify these risks within their overall process of ensuring capital adequacy.
• In their credit risk management, institutions are expected to consider climate-related and environmental risks at all relevant stages of the credit-granting process and to monitor the risks in their portfolios.
• Institutions are expected to consider how climate-related and environmental events could have an adverse impact on business continuity and the extent to which the nature of their activities could increase reputational and/or liability risks.
• Institutions are expected to monitor, on an ongoing basis, the effect of climate-related and environmental factors on their current market risk positions and future investments, and to develop stress tests that incorporate climate-related and environmental risks.
• Institutions with material climate-related and environmental risks are expected to evaluate the appropriateness of their stress testing with a view to incorporating them into their baseline and adverse scenarios.
• Institutions are expected to assess whether material climate-related and environmental risks could cause net cash outflows or depletion of liquidity buffers and, if so, incorporate these factors into their liquidity risk management and liquidity buffer calibration.
• For the purposes of their regulatory disclosures, institutions are expected, to publish meaningful information and key metrics on climate-related and environmental risks that they deem to be material, with due regard to the European Commission’s guidelines on non-financial reporting: supplement on reporting climate-related information.

The guide is applicable as of its date of publication. Significant institutions supervised by the ECB are expected to consider the extent to which their current management and disclosure practices for climate-related and environmental risks are sound, effective and comprehensive in the light of the expectations set out in the guide. Where this is needed, significant institutions are expected to promptly start enhancing their practices.

As part of the supervisory dialogue with the ECB, from early 2021, significant institutions will be asked by joint supervisory teams to inform the ECB of any existing divergences in their practices from the supervisory expectations described in the guide and to inform the ECB of arrangements aimed at progressively addressing these expectations. The ECB acknowledges that the management and disclosure of climate-related and environmental risks, and also the methodologies and tools used to address them, are currently evolving and are expected to mature over time.

This guide was developed jointly by the ECB and Member State competent authorities (NCAs) and is aimed at ensuring the consistent application of high supervisory standards across the euro area. NCAs are recommended to apply the expectations set out in the guide in their supervision of less significant institutions in a manner that is proportionate to the nature, scale and complexity of the activities of the institution concerned. The ECB acknowledges that a number of NCAs have issued, or are in the process of issuing, guidance on climate-related and environmental risks. Less significant institutions are invited to consider these as well as other relevant publications by their NCAs.