“Are banks walking the talk on climate?”, ECB’s November Thematic Review Investigates

The European Central Bank (ECB) has conducted a thematic review on climate-related and environmental risks (C&E) of 186 banks with total combined assets of €25 trillion. The main theme studied is to check whether the banking sector is meeting its supervisory expectations regarding these risks. It finds that virtually all institutions are starting to identify and manage their C&E risks, with most of them having basic practices that match the supervisory expectations (e.g., an initial mapping of risk exposures, allocating responsibilities within the organization, setting initial KPIs and developing a qualitative mitigation strategy for part of their risk exposures).

The review, however, finds that there is still a considerable lack of methodological sophistication, limited to no use of granular risk information and lack of active management of risk profile. Most notably, the review does not find any single bank that covers all the areas of risks it is, or it is likely to be materially exposed to. 96% of the institutions have blind spots, significantly underestimating the breadth and magnitude of the risks.