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This is good news, but it is only the first step. A great deal more work lies ahead. By the end of this year, we expect all banks under our supervision to be fully aligned with all our supervisory expectations on the sound management of C&E risks.
We have come a long way since we first started to discuss climate-related and environmental (C&E) risks with banks five years ago. Thanks to the banks’ own efforts and the ongoing dialogue between banks and supervisors, we have made good progress. I want to thank thousands of motivated C&E risk experts – bankers and supervisors alike – who through their hard work have built up notable expertise and achieved considerable progress. Across Europe, banks have taken decisive steps to integrate C&E risks into their strategies, governance and risk management. Most banks have now drawn up materiality assessments that are in line with the supervisory expectations we published in 2020. This is a fundamental step as materiality assessments are a crucial precondition for banks to be able to manage any kind of risk. But it is only the first step and a great deal more work lies ahead. 2024 is a crucial year for banks to make decisive progress in becoming more resilient to C&E risks.
Back in 2019, less than a quarter of the banks under our supervision had demonstrably reflected on how the climate and environmental crises were affecting their risk management. This observation was obviously concerning, so in 2020 the ECB published a guide on C&E risks setting out clear supervisory expectations about how banks should integrate these risks into their risk management, strategy and governance. In doing so, we were moving in lockstep with a broad global consensus in the Central Banks and Supervisors Network for Greening the Financial System (NGFS)[1] and the Basel Committee on Banking Supervision[2], acknowledging that C&E risks are a material source of financial risk and therefore need to be addressed by prudential supervisors.
Considering the clear requirements set out in the Capital Requirements Directive and the need for banks to identify and manage all their material risks, ECB Banking Supervision has repeatedly urged banks to ensure that they are managing C&E risks prudently. In other words, failing to adequately manage C&E risks is no longer compatible with sound risk management, just like turning a blind eye to other relevant risk drivers would not be acceptable either.
Over the past years, we have carried out a number of supervisory exercises to assess banks’ progress towards meeting our supervisory expectations. When we asked banks to do self-assessments in 2021, they reported that 90% of their practices were only partially or not at all in line with the ECB’s supervisory expectations. And this was despite half of the banks having already acknowledged the materiality of C&E risks. In 2022 we conducted a thematic review on C&E risks and a climate stress test, which again confirmed that banks considered themselves to be materially exposed to C&E risks.
Building on what the banks themselves found reasonable in their self-assessments and considering that most banks were still a long way from where they needed to be, we set a series of (interim) deadlines. First, we required banks to draw up adequate materiality assessments by the end of March 2023. Second, banks needed to integrate C&E risks into their governance, strategy and risk management by the end of 2023. And a last one at the end of 2024 by which banks should address these risks in full alignment with all our expectations. We have been clear that these deadlines apply to all banks and that - if and when necessary - we will use all the tools at our disposal to enforce these deadlines by when banks should have adequately addressed C&E risks....
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