EU banks have until 2024 to meet supervisory expectations on climate risks, says ECB

    The de facto central bank of Hong Kong has backed global principles on climate risk management a week after publication.

    The European Central Bank has given EU banks until 2024 to comply with its expectations on managing climate-related risks, which it described as a “reasonable” timeframe.

    Frank Elderson, vice chair of the ECB’s supervisory arm, said on Wednesday: “I see it as reasonable that banks can be fully compliant with all our expectations by the end of 2024 at the latest. At the same time, we remain open to listen to arguments of banks that may render this not feasible in individual cases.

    “The absence for some banks of a thorough and complete assessment of the C&E [climate and environmental] risks and their materiality cannot be a reason for lack of progress and should be remediated promptly.”

    The announcement comes two years after the ECB published its 2020 supervisory guidance on the topic, which includes requirements for banks to assess the impacts of C&E risks on their operations, establish a risk management framework in accordance with those risks, and disclose meaningful C&E information.

    The ECB has conducted two stocktakes on the implementation of the guidance’s disclosure element. The first, in 2021, found that the vast majority of disclosures fell significantly short of these expectations, while a subsequent assessment earlier this year found that, despite clear progress, “virtually none of the institutions … would meet the minimum level of disclosures” set out by the guidance.

    The ECB will begin scrutinising the operational element of its guidance via a “thematic review on how banks incorporate [climate] risks into their day-to-day business”, which will complement its annual supervisory review this year. Preliminary findings indicate that most banks have started to adapt their practices in line with ECB expectations, despite gaps on how they account for physical climate risks, and exposure to clients who are misaligned with the Paris Agreement, said Elderson.

    The bank will issue the results of a climate stress test – which makes up the remaining plank of the ECB’s supervisory approach to climate risks – in July, he added.

    Elderson also reiterated comments made in March, which warned that the ECB would consider climate and environmental risks when determining bank capital requirements from this year onwards.

    Separately, the Hong Kong Monetary Authority (HKMA) has endorsed new global banking principles on climate risks which would require financial institutions to ensure consistency between internal strategies and public statements on climate change.

    The principles, released last week by the Basel Committee on Banking Supervision, are intended to serve as a “common baseline” on climate risk management, and comprise 12 principles for banks and six for their supervisors.

    HKMA said that local banks “should take into account the guidance” while it assesses the need to revise the city-state’s supervisory framework in line with the principles.

    The ECB’s Elderson is co-chair of the Basel Committee taskforce which developed the principles.