2022 thematic review: climate-related and environmental risks

In November 2020 the ECB published its Guide on climate-related and environmental risks to ensure that the banking sector effectively and comprehensively addresses climate-related and environmental (C&E) risks. In early 2021 institutions were requested to perform a self-assessment of their current practices against the expectations set out in the Guide and to inform the ECB of their implementation plans for advancing the management of C&E risks. The outcome of the assessment showed that while some institutions had taken considerable steps, none of the institutions were close to fully aligning their practices with supervisory expectations and the quality of institutions’ implementation plans varied considerably. This year, the ECB has published both the results and good practices of the 2022 Thematic Review on climate and environmental risks.

ECB - 2022 thematic review on climate-related and environmental risks: results and best practices

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Executive summary

The results of the ECB's thematic review of institutions' progress in integrating climate and environmental risk management confirm that the European banking sector has at least basic practices in place for most of the areas addressed by the supervisory expectations. For less significant institutions (LSIs) on average the level of development is lower than for significant institutions (SIs). The report also provides key insights on the degree of integration of climate related risks into strategy, risk governance and appetite, materiality assessments and risk management. The results of the thematic assessment have been incorporated into the 2022 SREP.

Main content

This Technical Note summarises the main findings of the thematic review and includes some of the good practices identified:

• Scope. The thematic review covered 107 significant institutions (SIs) and 79 less significant institutions (LSIs).
• State of the banking sector. While banks have globally improved their capabilities since 2021, is still necessary to implement more sophisticated methodologies and granular information as well as cover all the areas of risks.
• Materiality assessment. More than 90% of banks conducted at least a basic materiality assessment for at least one of their main risk types. Some banks have developed a bottom-up risk identification process and integration into the risk management framework.
• Business environment and strategy. Most institutions have established an initial set of KPIs for their strategic response but still this is an initial approach at an early stage of development, not allowing effective implementation and monitoring of progress. On the other hand, climate-related risks are considered at least at a high level in the strategy, and some institutions apply target setting and portfolio alignment methodologies.
• Governance and risk appetite. Around 50% of institutions have already assigned roles and responsibilities to their management bodies, although the adjustment of remuneration policies is still at an early stage. Also, in most cases, banks' governance, risk appetite and reporting frameworks do not cover all material risk areas.
• Risk management. Significant room for improvement for sound and comprehensive management of climate-related and environmental risks. Regarding credit risk, only a quarter of banks have established at least basic climate related risk practices at all stages of the credit risk management cycle. On the other hand, banks are starting to consider physical and transition risk drivers in their operational risk management. Finally, in the area of market risk, institutions are advancing more slowly compared with credit risk or operational risk practices.

Next Steps:

• The ECB set institution-specific remediation timelines for achieving full alignment with the expectations by the end of 2024, providing details on intermediate steps:
  • by the end of March 2023, to have in place a sound and comprehensive materiality assessment, including robust scanning of the business environment;
  • by the end of 2023, to manage C&E risks with an institution-wide approach covering business strategy, governance and risk appetite, as well as risk management, including credit, operational, market and liquidity risk management;
  • by the end of 2024, to be fully aligned with all supervisory expectations, including having in place a sound integration of C&E risks in their stress testing framework and ICAAP.

Download the technical note 2022 thematic review on climate-related and environmental risks: results and best practices.