The European Central Bank has published a report stating that most banks it supervises are not aligned with its climate-related and environmental (C&E) risk management goals.
The report, which covers 112 banks with over €24 trillion in combined assets, has been published a year after ECB published its guide on C&E risks for banks.
The authority stated that almost all banks that participated in its exercise are “only partially – or not at all – aligned with the ECB’s supervisory expectations.”
Many lenders recognise that C&E risks will materially impact them especially in terms of credit, operational and business model risk in the next three to five years.
However, the banks that regard C&E risks as being immaterial to them do not have an appropriate materiality assessment in place, the ECB added.
The ECB noted that most banks are working to meet its C&E risks management goals. They have made the most progress on the governance and policy front.
Some lenders have combined C&E risks into their lending policies, while some have attributed formal responsibilities for managing such risks.
The banks are failing to identify and measure these risks through key indicators and they have made the least progress in areas of internal reporting, market and liquidity risk management, and stress testing.
Notably, the report comes before the ECB’s climate stress test on banks in 2022.
The regulator will review C&E risk management practices next year and plans to ‘gradually’ integrate them into capital requirements, which will force complaint lenders to increase reserved capital.