The clock is ticking for banks to manage climate-related and environmental risks
  • Tuesday, 21 September 2021

The clock is ticking for banks to manage climate-related and environmental risks

In November 2020, the European Central Bank (ECB) published its guide on climate-related and environmental (C&E) risks. The ECB shared 13 supervisory expectations with respect to the anticipated transitioning to a low-carbon and more circular economy. Once the guide was published, ECB Banking Supervision asked banks to assess themselves against the 13 expectations. A new article of the ECB shares some of the preliminary findings on current practices and plans, based on supervisors’ assessments. It shows that banks have started laying down the groundwork for reflecting C&E risks in their current structures: roughly half of the banks are adapting their governance arrangements by allocating dedicated resources and assigning responsibilities, among others. Banks on the other hand are indicating that the climate risk stress test of the ECB in 2022, announced in November last year, is likely to fail due to limited data availability. The ECB has shared confidential documents with banks informing them they will need to show how climate change will affect their balance sheets through 2050. Additionally, the regulator plans to study the link between profits and carbon risk in banks’ portfolios. It is possible that banks burdened by carbon-intensive portfolios will face higher capital requirements, causing dividends to decrease.

For more information, please contact Pieter Klaassen.