The European Central Bank (ECB) published results of the 2022 supervisory assessment of climate-related and environmental risk disclosures among significant institutions (103) and a selected number of less significant institutions (28). This assessment was highlighted as one of the supervisory priorities for 2023-25 and is based on the expectations for banks, as set out by ECB in its November 2020 Guide on climate-related and environmental risks.
The assessment reveals that the quality of environmental and climate risk disclosures by banks is still too low to meet the upcoming supervisory standards, although banks have, in the past year, increased the information they publish. Compared with last year’s assessment, banks have significantly increased the amount of basic information that they disclose across categories. For example, the percentage of significant banks disclosing material exposures to climate and environmental risks rose from 36% to 86%. Moreover, nearly all banks now state how their board oversees climate and environmental risks and over 90% provide basic descriptions on how they identify, assess, and manage these risks. However, the quality of disclosures is often insufficient. Of the significant banks in the exercise, only 6% disclose at least broadly adequate information in all five categories of the assessment. While 50% of the banks now provide some information on the amount of emissions they finance, in the vast majority of cases this information is incomplete, unspecific, or not properly substantiated. Additionally, the largest European banks generally have better disclosures than their non-EU based counterparts, but they nonetheless fail to fully meet ECB expectations. The overall conclusion is that banks appear largely unprepared for the impending EBA standards on Pillar 3 disclosures.
This assessment report illustrates good practices that banks can consider in their efforts to align disclosures with supervisory expectations. It covers observed practices related to climate and environmental risk disclosures and provides examples of visualization and substantiation of risk indicators and information that could be useful for users. Earlier, ECB had also published reports on the good practices observed in the 2022 climate risk stress test and on a compendium of good practices observed as part of the 2022 thematic review on climate and environmental risks. Frank Elderson, Vice-Chair of the Supervisory Board of ECB says, “Stricter disclosure rules are taking effect this year. If necessary, we will take the appropriate supervisory actions to ensure that banks comply.” Supervisors have informed banks of their findings, requesting them to address shortcomings and to provide plans on how they will prepare to meet the impending EBA reporting standards. In the second half of 2023, ECB will review whether the eligible banks fulfil the new standards. Non-compliance will constitute a breach of the Capital Requirements Regulation (CRR) and result in supervisory action.
Climate and environmental risks are one of the supervisory priorities for 2023-25 and ECB is gradually integrating these risks into its regular supervisory methodology. As part of these efforts, ECB, in November 2022, set staggered deadlines for banks to progressively meet all the supervisory expectations laid out in its Guide on climate-related and environmental risks by 2024. The central bank also carried out a climate stress test last year, which showed that banks were not yet sufficiently incorporating climate risk into their stress-testing frameworks and models. Additionally, a thematic review by ECB had showed that banks continue to significantly underestimate the breadth and magnitude of such risks and almost all banks (96%) have blind spots in identifying them. For a small number of banks, the outcome of these exercises had an impact on their 2022 Supervisory Review and Evaluation Process (SREP) scores, which in turn affected their Pillar 2 requirements. ECB has also set institution-specific deadlines for achieving full alignment with its expectations. ECB has communicated its expectation to banks to reach certain minimum milestones. First, ECB expects banks to adequately categorize climate and environmental risks and to conduct a full assessment of their impact on the banks’ activities by March 2023. Next, by the end of 2023, ECB expects banks to include climate and environmental risks in their governance, strategy, and risk management. Finally, by the end of 2024, banks are expected to meet all remaining supervisory expectations on climate and environmental risks outlined in 2020, including full integration in the Internal Capital Adequacy Assessment Process (ICAAP) and stress testing.
Keywords: Europe, EU, Banking, ESG, Climate Change Risk, Disclosures, Environmental Risk, Pillar 3, Basel, EBA
Hasan leads Moody’s Analytics ESG methodology development. He is expert on carbon transition, nature related risks and is a guest lecturer at ESSEC Business school on sustainable finance.
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