ECB publishes guide on climate-related and environmental risks for banks
The European Central Bank (ECB) has published the final version of its guide on climate-related and environmental banks, following a public consultation. The guide explains how the ECB expects banks to prudently manage and transparently disclose such risks under current prudential rules.
The ECB notes how the transition to a low-carbon and more circular economy entails both risks and opportunities for financial institutions. The report identifies two different types of risks stemming from climate change and environmental degradation: physical risks (financial impact of a changing climate) and transition risks (financial loss resulting from a transition to a greener economy). Both types of risks are drivers of existing and long-term risks of financial institutions.
The ECB’s guide, which is not binding for institutions, includes an overview of its supervisory expectations, which overall call for banks and financial institutions to include these risks when developing their business strategy and risk management framework, and also publish key metrics on these issues in their regulatory disclosures. The ECB will engage in a supervisory dialogue in 2021 with banks on the basis of a self-assessment it is calling on them to make in light of the supervisory expectations outlined in the guide.
A further ECB report found that banks are lagging behind on their climate-related and environmental risk disclosures.
Read the ECB’s report here.