Banks in the EU have made “significant strides” in addressing and managing climate and nature-related risks, according to European Central Bank (ECB) Executive Board Member and Supervisory Board Vice-Chair Frank Elderson, with major increases in advanced practices in place to identify, monitor these risks made by banks in just the past few years.
While noting the progress, however, Elderson also said that more work needs to be done by European banks to expand these risk identification and management practices across all relevant exposure areas and risk categories.
The post by Elderson follows the ECB’s decision in late 2022 to step up efforts to address climate change as one of the central bank’s top priorities for its supervision of banks for 2023 – 2025. Earlier that year, the ECB’s climate stress test indicated that banks urgently need to accelerate the incorporation of climate risk into their risk management frameworks, and that banks remain heavily exposed to emissions-intensive industries.
Elderson pointed to several key metrics indicating the progress that banks have made on climate and nature-related risks over the past few years. According to the post, more than half (56%) of banks had leading climate-related and environmental risk management practices for at least some exposures in alignment with ECB supervisory expectations as of the end of 2024, compared with only 3% of banks in 2022. Similarly, while 25% of banks were found in 2022 to not have any climate-related and environmental risk management practices in place, this figure dropped to only 5% by the end of 2024.
The ECB also found significant progress in the advancement of advanced practices, noting that banks’ materiality assessments are becoming increasingly sophisticated, as more than 90% of banks now consider themselves to be materially exposed to climate-related and environmental risks, compared with only half of banks reaching this assessment in 2021.
In addition, the ECB noted that all banks now include climate risk in their stress testing frameworks, compared with only 41% who did so in 2022.
While welcoming the progress made, Elderson also noted several areas for further improvement. The ECB found, for example, that while banks are broadly incorporating sound practices in their climate and environmental risk management frameworks, many banks are applying these only to a subset of their relevant exposures, risk categories and geographical areas. Specifically, the ECB noted that mortgage lending is not always fully considered in banks’ management of climate and nature-related risks, and that banks are more advanced in these areas when addressing credit risk, but less so for operational or market risk.
Additionally, while banks are now integrating climate risk in their stress testing frameworks, the ECB noted that some have not yet included all material risk drivers, relevant portfolios or transmission channels and may still be underestimating these risks, and that most banks still do not cover all material climate and nature-related risk drivers in their capital adequacy assessments.
In the post, Elderson said:
“This progress has not come out of thin air. It has been achieved thanks to the hard work of many motivated bankers – including climate risk experts, risk managers and internal auditors – all across Europe in all types of banks, be they big, small, local or global. I would like to express my appreciation for these efforts. The progress made is also a testament to the effectiveness of the ECB’s multi-year strategy to ensure banks build up resilience to climate and nature-related risks.”
