On 2 November 2022, the European Central Bank (ECB) published the results of its thematic review, which shows that banks are still far away from adequately managing climate and environmental risks.
The thematic review aimed to check whether EU banks adequately identify and manage climate risks as well as environmental risks such as biodiversity loss. It also delved into EU banks’ risk strategies and their governance and risk management processes. The ECB’s supervisory expectations on EU banks were set out in the ECB guide on climate-related and environmental risks published in November 2020 to ensure that the EU banking sector effectively and comprehensively addresses climate-related and environmental risks.
The review concluded that, even if 85% of EU banks now have in place at least basic practices in most areas, they are still lacking more sophisticated methodologies and granular information on climate and environmental risks.
There is also supervisory concern related to the execution capabilities of most EU banks, where effective implementation of their practices is still lagging behind. As a result, EU banks continue to significantly underestimate the breadth and magnitude of such risks, and almost all banks (96%) have blind spots in identifying them.
While there can be exceptions in individual cases, the ECB has communicated its expectation to EU banks to reach, as a minimum, the following milestones:
- The ECB expects EU banks to adequately categorise climate and environmental risks and conduct a full assessment of their impact on their activities by March 2023 at the latest.
- The ECB expects EU banks to include climate and environmental risks in their governance, strategy and risk management by, at the latest, the end of 2023.
- By the end of 2024 EU banks are expected to meet all remaining supervisory expectations on climate and environmental risks, including full integration in the Internal Capital Adequacy Assessment Process and stress testing.
These deadlines will be closely monitored and, if necessary, enforcement action will be taken.