CUBE RegNews:
15^th June

“Much done, much more to do – climate risks and the banking sector”       

Sharon Donnery, Deputy Governor, Central Bank of Ireland and Member of the Supervisory Board of the European Central Bank (ECB) has been speaking at the BPFI Retail Banking Conference 2023. In her speech, Donnery addressed ESG integration in the banking sector, covering several themes. Donnery noted her expectation that the financial sector should be taking a leading role in addressing the climate challenge and how “embedding climate-related and environmental risk management in the banking system goes to the very heart of what we [the ECB] do”. 

Outlining the findings of supervisory exercises carried out in 2022, she noted several findings including: 

• Considerable progress has been made with respect to banks’ climate stress-testing capabilities, but there are many deficiencies, data gaps and inconsistencies across institutions. 
• Many banks also appeared to lack clearly defined long-term strategies for credit allocation policies that reflect the various transition paths, or are in the initial stages of factoring climate risk into their credit risk models.  
• Banks need to invest more in climate-relevant data collection and become less dependent on the use of proxies. 
• Banks need to better understand how climate risks impact their business models, their strategies do not address all risks comprehensively. 
• While organisational structures have improved, they are still in the early stages of tackling climate risks in a detailed comprehensive manner. 
• From a risk management perspective, again while progress has been identified in the development of methods to measure climate risks, only 25% of banks can call on advanced methods. 

Pointing out that addressing these issues is hard but necessary, Donnery reminded the audience that “by the end of 2024, we and the ECB expect significant institutions to meet all remaining supervisory expectations on climate and environmental risks, including full integration in the Internal Capital Adequacy Assessment Process (ICAAP) and stress testing.”