ECB finalized guidance on the way it expects banks to prudently manage and transparently disclose climate and other environmental risks under the current prudential rules. The guide will apply immediately and ECB expects banks to perform self-assessment on ECB expectations in early 2021, with the ECB expecting to fully review bank practices in this area in 2022. ECB announced that the next supervisory stress test in 2022 will also focus on climate-related risks and that more details will be provided on this during 2021. In addition, ECB published a report that examined the climate and other environmental risk disclosures of institutions and concluded that banks are lagging behind on disclosures in the area of climate and other environmental risks.
The guide on climate and environmental risks describes how ECB expects institutions to consider climate-related and environmental risks when formulating and implementing their business strategy and governance and risk management frameworks. The guide covers supervisory expectations with respect to data governance, disclosures, and management of credit, market, operational, and liquidity risks. This guide is not binding for the institutions, but rather it serves as a basis for supervisory dialog. Significant institutions are expected to use the guide, taking into account the materiality of their exposure to climate-related and environmental risks. For the purposes of this guide, materiality should be considered in the light of the applicable Capital Requirements Directive and Regulation (CRD and CRR) provisions. The guide was developed jointly by ECB and the national competent authorities and is aimed at ensuring consistent application of supervisory standards across the euro area. The national authorities are, therefore, recommended to apply the expectations set out in this 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. 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.
The report on the assessment of climate and environmental risk disclosures provides a snapshot of the level of disclosure of climate and environmental risks in the Single Supervisory Mechanism (SSM) countries. In addition to providing an overview of the observed practices, the report identifies areas for improvement. It provides a baseline against which progress towards alignment with supervisory expectations can be measured in the future. The assessment was performed in view of the supervisory expectations set out in the guide on climate-related and environmental risks. To that end, the comprehensiveness of climate and environmental risk disclosures of 107 significant institutions and 18 less significant institutions in the reference year 2019 were assessed. The assessment concludes that, as of now, virtually none of the institutions in the scope of the assessment would meet a minimum level of disclosures set out in the ECB guide on climate-related and environmental risks and in the related recommendations in EC guidelines on non-financial reporting and of the Task Force on Climate-related Financial Disclosures (TCFD). While there has been some improvement since the previous year, banks need to make significant efforts to better support their disclosure statements with relevant quantitative and qualitative information. ECB intends to identify remaining gaps and discuss them with the banks, in the second half of 2021.
Keywords: Europe, EU, Banking, ESG, Sustainable Finance, Climate Change Risk, Disclosures, Stress Testing, CRD, Basel, ECB
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