Climate change can severely test the resilience of economies, cities and businesses. And, as a consequence, that of banks too. Analysts, academics and investors have been saying so for some years now, yet European credit institutions still seem somewhat reluctant to put these risks and the strategies they intend to adopt to address them down in black and white. The European Central Bank (ECB) is therefore stepping in and will, from now on, also subject them to climate stress tests.

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Climate change and environmental degradation will increasingly affect banks’ balance sheets. The ECB is therefore stepping up its efforts and scrutiny to strengthen banks’ resilience against related risks. Read more in the Supervision Newsletter bankingsupervision.europa.eu/press/supervis…

♥ 28💬 6 27 nov 2020 · Apri su X →

Banks still lacking transparency on environmental risks

The climate is a variable that must be taken into account for two reasons. The first is physical risk, classified as "acute" when caused by extreme events such as drought, floods and storms, and as "chronic" when it stems from more gradual changes such as the loss of biodiversity, resource scarcity or rising sea levels. The second is transition risk. The entry into force of new regulations, technological progress and shifting market preferences will upset established equilibria and require the capacity to adapt.

With a report published at the end of November, the European Central Bank set out to verify whether, and how, 125 financial institutions (107 large and 18 smaller ones) had disclosed these climate and environmental risks. The outcome is a resounding failure. "Significant efforts are needed to promote transparency in financial markets," the document reads. And further, "there is a general lack of articulation of climate-related topics and too rarely are statements supported by quantitative data." At least, it continues, some sporadic progress has been noted over the past two years.

Climate stress tests to debut in 2022

To drive change, the European Central Bank carried out an extensive public consultation that resulted in a fully fledged Guide on climate-related and environmental risks. In addition to providing practical guidance on the management and disclosure of these risks, the document announces two new developments.

First, in the early months of 2021 banks will be required to carry out a self-assessment of their capacity to meet the guide's expectations and, on that basis, draw up an action plan. Both will be scrutinised by the ECB, which may subsequently intervene where necessary.

The second milestone is 2022, when the stress tests are scheduled. Every two years, the ECB puts the balance sheets of major banks under the microscope to determine whether they are capable of withstanding a sudden external shock. Alongside debt crises, recessions and other purely economic scenarios, these crisis scenarios will from now on also include climate change. The ECB is thus following the example of the Bank of England, which will begin in 2021. This demonstrates how much the financial sector cannot turn a blind eye to the ongoing environmental emergency — and must play its part in building resilience.