Following the adoption of the Paris Agreement on climate change and the UN 2030 Agenda for Sustainable Development in 2015, governments are making strides to transition to low-carbon and more circular economies on a global scale. In Europe, the European Green Deal sets out the objective of making the continent the first climate-neutral one by 2050. In this sense, the financial sector is expected to play a key role and for the second year, the ECB has identified climate-related risks as a key risk driver on the SSM Risk Map for the euro area banking system.
Guide on climate-related risks ECB
In this context, the ECB has published the ECB Guide on climate-related and environmental risks, which outlines the ECB’s understanding of the safe and prudent management of climate-related and environmental risks (hereafter referred to as climate risks) under the current prudential framework, the expectations on how institutions should consider these risks – as drivers of established categories of prudential risks – when formulating and implementing their business strategy as well as their governance and risks management frameworks, and the expectations on how institutions should become more transparent by enhancing their disclosure of information.
This Technical Note summarizes the main aspects included in the ECB Guide on climate-related and environmental risks.
Executive summary
The ECB Guide on climate-related and environmental risks outlines the regulator´s understanding of the safe and prudent management of such risks under the current framework, as well as its expectations on how institutions should address this matter.
Scope of application
This guide is to be used mainly by significant institutions directly supervised by the ECB, although it has been developed jointly by the ECB and the national competent authorities (NCAs) and they are recommended to apply the expectations in their supervision of less significant institutions (LSIs), proportionately to the risk profile and business model of the institution.
Main content
- Supervisory expectations relating to business models and strategy. Institutions are expected is to identify, assess and monitor the current and forward-looking impact of climate-related and environmental factors on their business environment and to ensure the sustainability and resilience of their business model going forward.
- Supervisory expectations relating to governance and risk appetite. Institutions are expected to embed climate risks in their governance and risk appetite frameworks, while adequately involving all relevant functions. Additionally, appropriate and regular reporting on these risks to the management body is expected.
- Supervisory expectations relating to risk management. This guide provides detailed guidance on integrating climate risks into credit, operational, market and liquidity risk management, as well as into the ICAAP, including risk quantification by means of scenario analysis and stress testing.
- Supervisory expectations relating to disclosures. This guide establishes that institutions are expected to publish meaningful information and key metrics on climate risks that they deem to be material, as a minimum, in line with the European Commission’s Guidelines on non-financial reporting: Supplement on reporting climate-related information.
Access the full document in English (document also available in Spanish).