DNB published good practices and questions and answers (Q&A) for integrating climate-related risks into the governance, risk management, and reporting of banks. In the Q&A, DNB offers an interpretation of how the existing legislation, including the Capital Requirements Directive (CRD) IV, applies to climate-related risk management. DNB also published a feedback statement on the responses received during the consultation process for the good practices and Q&A. The good practice and Q&A are in line with European developments in this area. ECB, too, will consult the sector on climate-related risks and expects to present its supervisory expectations for this later in the year. In addition, EBA has been mandated to investigate how environmental, social, and governance, also known as ESG, risks can be included as part of the Supervisory Review and Evaluation Process or SREP.
The document contains some of the good practices observed by DNB and demonstrates how climate change can be a driver of conventional risk types such as credit, market, and operational risk. It then sets out the applicable legislation and regulations, before finally presenting the good practices that are in line with sound governance, risk management and disclosure of climate-related risks. Banks should incorporate climate-related risks into their governance and risk management arrangements in line with the principle of proportionality. The good practices revolve around the following three thematic areas that represent the core elements of how banks operate:
- Governance. As good practices, DNB includes an organization-wide strategic approach toward climate-related risks, along with the integration of climate-related considerations in policy framework.
- Risk Management. Banks’ existing risk management frameworks are an appropriate starting point to assess financial risks arising from climate change. The good practices are structured around four inherent functions of the risk management framework of a bank—namely, risk identification, risk assessment, risk mitigation, and risk monitoring. For risk identification, the included good practices involve development of a climate-related risk heat map to identify potential risk concentrations and the use of climate scenario analyses to inform strategic decision-making. For risk assessment, the use of stress-testing to assess the materiality of climate-related risks and the methodology to assess the relation between carbon footprint and climate-related risks has been suggested. For risk mitigation, the DNB good practices include implementation of concrete climate-related risk mitigation measures and mitigation of physical risk affecting own operations of a bank. Finally, the good practices outlined for risk management are the integration of climate-related risk indicators in risk appetite statement and the integration of climate-related risk assessment in due diligence process.
- Disclosures. One good practice in this area would be disclosure of carbon footprint of lending and investment portfolio in annual report. Keeping in mind the existing data gaps in climate risk assessment, another outlined area of good practice is active client engagement to bridge existing data gaps. As an example, the good practices document points out that, to increase data availability, a bank has implemented a policy to promote active engagement with its clients to bridge any existing climate-related information gaps and, thus, increase its ability to identify and manage any climate-related risk concentrations to which it is exposed.
Keywords: Europe, Netherlands, Banking, Climate Change Risk, Good Practices, Q&A, Governance, Disclosure, ESG, CRD IV, SREP, DNB
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
The Federal Financial Supervisory Authority of Germany (BaFin) proposed to amend the “Capital Investment Conduct And Organization Ordinance” and issued a draft circular on the minimum resolvability requirements for resolution planning.
The European Banking Authority (EBA) proposed guidelines, for the resolution authorities, on the publication of the write-down and conversion and bail-in exchange mechanic, with the comment period ending on September 07, 2022.
The Financial Services Authority of Indonesia (OJK) is strengthening cooperation with the Australian Prudential Regulation Authority (APRA) and the Japanese Financial Services Agency (JFSA)
The European Parliament and the Council published Regulation 2022/868 on European data governance (Data Governance Act).
The European Banking Authority (EBA) published phase 2 of its reporting framework 3.2. The technical package supports the implementation of the updated reporting framework by providing standard specifications