ECB and MFSA Review Bank Preparations for Addressing Climate Risks
The European Central Bank (ECB) and the Malta Financial Services Authority (MFSA) recently reviewed the preparations banks are making to assess and mitigate the risks posed by climate change to their business models. In a Circular, MFSA has published the results of this review for the less significant banks, notes the areas in which further work is required, and has requested banks to accelerate their preparations and present the progress.
MFSA concluded that all banks in Malta need to strengthen their governance arrangements by engaging with their customers to collect data so they can meet their disclosure obligations, by improving their understanding of climate-related and environmental risks, and by putting in clearer plans to assess climate-related risks and integrate them into their risk management frameworks. The review aimed to assess the soundness, effectiveness, and comprehensiveness of climate-related and environmental risk management practices of banks and align them with them the ECB guidance (of November 2020) on climate-related and environmental risks. The review notes that:
- Banks in Malta are in the very early stages of taking steps to integrate climate-related and environmental risk into their risk management frameworks. Therefore, increased momentum will be needed so that banks hit the expected legislative deadlines.
- When evaluating the existence and quality of practices for climate-related and environmental risks, some banks have initiated a few basic practices on climate-related and environmental risks but there is a lot of work to do to move beyond the first phase of preparation.
- Climate-related and environmental risk practices do not yet comprehensively consider the main portfolios and business lines of banks as well as the sectors and the geographies in which they are active.
- Banks do not have systems to evaluate relevant risk drivers such as the impact of market forces, including technology on transition risks. Similarly, banks do not yet map the physical risk impact to financial risks.
- Banks need to develop mechanisms to consider the various time horizons over which risks can materialize.
- Some banks informed MFSA about plans to align themselves with the ECB guide, though these plans have not yet been "actioned."
Related Link: Thematic Review Circular (PDF)
Keywords: Malta, Banking, ESG, Europe, MFSA, Climate Change Risk, ECB
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