ECB sets strict deadlines to deal with climate risks and for some banks climate and environmental risks had an impact on their SREP scores in 2022 and their Pillar 2 capital requirements respectively

The European Central Bank (ECB) published in November 2022 the results of its thematic review, which shows that banks are still far from adequately managing climate and environmental risks. The ECB is now setting staggered deadlines for banks to progressively meet all the supervisory expectations it laid out in its Guide on climate-related and environmental risks in 2020. The ECB also published a compendium of good practices observed in some banks, demonstrating that swift progress is possible and aiming to facilitate the improvement of practices across the sector.

Exposure to climate-related and environmental risks is among ECB Banking Supervision’s strategic priorities for 2022-24. ECB sets deadlines for banks to progressively meet all supervisory expectations by end of 2024. The deadlines will be closely monitored and, if necessary, enforcement action will be taken. Supervisors are already including bank-specific climate and environmental findings in the Supervisory Review and Evaluation Process (SREP). The ECB imposed binding qualitative requirements on more than 30 banks in its annual SREP. Moreover, for a small number of banks, the outcome of the 2022 supervisory exercises on climate and environmental risks had an impact on their SREP scores. These, in turn, impact their Pillar 2 capital requirements.

The thematic review aimed to check whether banks adequately identify and manage climate risks as well as environmental risks such as biodiversity loss. It also delved into banks’ risk strategies and their governance and risk management processes. The review concluded that, even if 85% of banks now have in place at least basic practices in most areas, they are still lacking more sophisticated methodologies and granular information on climate and environmental risks. There is also supervisory concern related to the execution capabilities of most banks, where effective implementation of their practices is still lagging behind. As a result, banks continue to significantly underestimate the breadth and magnitude of such risks, and almost all banks (96%) have blind spots in identifying them.

The ECB has set institution-specific deadlines by the end of 2024 for achieving full alignment with its expectations in the Guide on climate-related and environmental risks. In a first step, the 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 at the latest.

In a second step, and at the latest by the end of 2023, the ECB expects banks to include climate and environmental risks in their governance, strategy and risk management. Some banks have already started to plan for the transition to a low-carbon economy and to engage with their clients. However, a wait-and-see approach still prevails in most banks. For example, banks do not set interim targets or limits to their risk-taking with a view to fulfilling their long-term strategic commitments or set them in such a way that the immediate impact on the bank’s business is negligible.

In a final step, by the end of 2024 banks are expected to meet all remaining supervisory expectations outlined in ECB 2020 Guide on climate-related and environmental risks, including full integration in the Internal Capital Adequacy Assessment Process (ICAAP) and stress testing.

In 2022 the ECB also checked banks’ management of climate-related and environmental risks through on-site inspections. In March 2022 ECB completed a gap analysis of banks’ disclosures of climate-related and environmental risks.

In April 2022 the European Commission has adopted technical standards to be used by financial market participants when disclosing sustainability-related information under the Sustainable Finance Disclosures Regulation (SFDR).  Under these rules, financial market participants will provide detailed information about how they tackle and reduce any possible negative impacts that their investments may have on the environment and society in general.  The rules apply from 1 January 2023. 

How can we help?

On top of ECB and EC initiatives for climate and environmental risks, there are many initiatives and guidelines as well from the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) on ESG. These Guidelines are related to the overall regulatory framework concerning ESG and contain specific requirements, which are mandatory for the financial institutions and frequently refer to other regulatory guidelines or legal acts. The implementation of the guidelines and regulations in the practice is time consuming and requires significant resources of highly qualified specialists for the analysis and incorporation of the requirements in the existing internal regulations and practice in the financial institution. 

Deloitte is committed to provide the necessary knowledge, experience, and practical approach for the successful completion of projects for the implementation of all relevant regulations concerning ESG. 

We are here to support your organization with the following services: 

• Training – we can provide trainings to all staff for raising awareness as well as specialized deep-dive workshops for target groups on the ESG compliance requirements and best practices.
• Taxonomy - assess eligibility and alignment of Bank’s portfolio with EU Taxonomy.  Develop methodologies for assessment. 
• Disclosures- develop and define data required for all disclosures, mandatory for Banks in the long-term.
• Materiality assessment - assess the “AS-IS” impact of climate and environmental changes on the „traditional” risk types, based on qualitative and, where available, quantitative methods.
• ESG Strategy - based on the materiality assessment of the status of the client, Deloitte can develop the aspiration levels within the ESG Strategy.
• Data collection - develop and implement data collection requirements and tools for ESG from clients and public sources.
• ESG policies and procedures - Update the policies and procedures to incorporate ESG risk management.
• Methodological support for the implementation of the new requirements – support banks in any practical challenges they face in the implementation of the new ESG requirements. 

Contact us:

Dimitrios Goranitis
Partner, Deloitte Central Europe
Leader Banking and Regulatory Risk
digoranitis@deloittece.com

Ekaterina Hristova
Director, Deloitte Central Europe
Financial Services Industry Risk and Regulatory
ehristova@deloittece.com