The European Central Bank launched a consultation on 20 May 2020 on its guide on climate-related and environmental risks

LONDON, FRIDAY 22 MAY 2020: EY welcomes the European Central Bank’s (ECB) consultation, and Gill Lofts, EMEIA and UK Head of Sustainable Finance at EY, commented:

We welcome the ECB’s consultation, which gives increased clarity on how banks will need to manage and report their climate-related risks. This should ultimately make the banking system safer and more sustainable, and support banks in their key role helping finance a future greener economy.

The paper makes clear that banks must consider climate-related and environmental risks in both their business strategy and across their governance and risk management.  The ECB also adds that banks should be assessing whether their current practices are safe and prudent in the light of this rising expectation and, if necessary, to start adapting them. Many banks have already started this but the pace of activity must ramp up if we are to see real progress.

Below is a summary of some of the key points in the consultation:

Strategy: Banks need to understand the impact of climate-related risks and integrate them into their strategies. This process should be informed by scenario analysis and subsequently managed by a suite of Key Risk Indicators (KRIs).

Governance: The ECB expects firms’ senior management to consider climate-related risks when developing their business and risk management strategies and business objectives, and to link them to the relevant Key Performance Indicators (KPIs) and KRIs. Firms are also expected to exercise self-oversight, and to include climate-related risks in their risk appetite framework.

Internal reporting: The needs to be regular and meaningful reporting developed to inform decision-making at board level. To to this, the ECB highlights in the consultation paper that they expect firms to develop a holistic approach to data governance for climate-related and environmental risks, and to adapt IT systems accordingly to deliver in a timely manner.

Risk management: The ECB expects an assessment to be carried out by each firm which documents the impacts on the existing risk inventory, covering transmission channels and materiality (now and looking forward). The regulator also sets out an expectation that the risk management framework and process of ensuring capital adequacy should be adapted to embed climate-related and environmental risks.

Disclosures: The ECB points to the need for an internal disclosure policy, considering all material risks, and highlights the European Commission’s Guidelines on non-financial reporting and the Task Force on Climate-related Financial Disclosures (TCFD). The ECB also notes the need for banks to include KPIs and KRIs when setting their strategies and risk management processes, and when recording performance against them.

Find out more about Sustainability in financial service here.