European banks have made forward strides in managing climate and nature-related risks. But more still needs to be done as we often see that practices are only applied to a subset of relevant exposures, geographic areas and risk categories. To help banks improve further, later this year the ECB will publish an updated set of good practices observed in banks across Europe. European banks are well positioned to meet the prudential transition plan requirements, which the ECB will approach in a gradual and tailored manner.
European banks have made significant strides in addressing the risks stemming from the ongoing climate and nature crises. Considering that back in 2019 less than a quarter of euro area banks had reflected on how global heating and nature loss affected their own risk management, this is good news. Since then, banks have significantly stepped up their efforts. Now they have an increasing number of advanced practices in place to identify, monitor and - most importantly - manage climate-related and environmental risks.[1] In European banking supervision we have typically referred to climate-related and environmental risks, or C&E risks. For the purposes of this blog post, I will consider the terms "environmental risks" and "nature-related risks" as interchangeable.
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.[2] The ECB first started discussing C&E risks with banks back in 2019, when less than a quarter of banks had demonstrably reflected on how the climate and nature crises affected their risk management. In 2020 the ECB published a guide setting out its understanding of the sound management of C&E risks under the existing prudential framework. In subsequent years we conducted several in-depth supervisory exercises, including a bank self-assessment exercise in 2021, and a thematic review on C&E risks and a climate risk stress test in 2022. We then set clear interim and final deadlines by which banks had to meet certain conditions to be able to manage their C&E risks.
Walking the walk on climate and nature-related risks
The evolution of banks' climate-related and environmental risk management capabilities (Chart 1) shows that banks have walked the walk and made forward strides.
Chart 1
Banks' alignment with ECB supervisory expectations on climate-related and environmental risks
Source: ECB
Notes: Chart shows level of maturity of individual banks' practices aligned with 2022 C&E risks thematic review assessment grid. For consistency purposes, progress is measured against what was basic, emerging and leading practices in 2022. Outcomes focus on soundness of banks' practices and do not represent the comprehensiveness of practices across all exposures.
This means, for example that a bank is ranked dark green if it has a leading practice in place, even if that leading practice only relates to a subset of its exposures. The same holds true for light green: this qualification indicates that a bank has emerging practices in place, even if that emerging practice only relates to a subset of its exposures. In other words, the charts do not say anything about the percentage of assets covered by leading or emerging practices.
In 2022, 25% of banks had no practices in place, 54% had basic practices for at least some exposures in place, 18% had emerging practices for at least some exposures in place and 3% had leading practices for at least some exposures in place.
By the end of 2024, 5% of banks had no practices in place, 17% had basic practices for at least some exposures in place, 22% emerging practices for at least some exposures in place and 56% leading practices for at least some exposures in place.
Yet it is also fair to say that the journey has not always been easy. Back in 2022, almost 80% of banks had either only basic climate-related and environmental risk management practices in place or none at all. Based on their modest levels of preparedness at the time, after the 2022 thematic review on climate-related and environmental risks and the climate risk stress test, we encouraged banks to speed up their progress and we set clear interim deadlines for 2023 and final deadlines for the end of 2024.
Let me be clear: on a positive note, the number of banks lacking foundational elements has decreased sharply in the last few years.[3]
