Latest ECB assessment finds banks must get better at disclosing climate risks

The European Central Bank has published an updated assessment report on the progress banks have made on disclosing climate-related and environmental risks as set out in the ECB's November 2020 guide. The ECB found that, although there have been improvements since its first assessment in late 2020, these are "marginal" and no bank fully meets the supervisory expectations.

The ECB urges banks to adjust their practices without delay, as regulation of environmental risk disclosures is set to become stricter in the coming years.

In a speech on the findings, Frank Elderson, Member of the Executive Board of the ECB, comments:

"We end up with a lot of white noise and no real substance on what both markets and supervisors really want to know: how exposed is a bank to climate and environmental risks and what is it doing to manage that exposure?"

and he reminds that the ECB has "the option to publicly list those banks which repeatedly fail to disclose their climate and environmental risks." 

The ECB's assessment found that significant gaps remain, including:

• the overall level of transparency remains insufficient;
• banks' disclosure of key metrics is not sufficiently in line with supervisory expectations; and
• many banks do not sufficiently substantiate their climate and environmental risk disclosures.

Good practices that banks employ were also identified, and the ECB said these practices confirm the sector's ability to adjust. For example, one bank aiming for net zero emission in its portfolio by 2050 published several interim targets and the progress made toward them, as well as underlying methodologies and scenarios. Also, some banks disclose dashboards on the performance of their loan books in various transition sectors, such as power generation, oil and gas or automotive, using a science-based transition pathway.

The ECB has sent individual feedback letters to the banks explaining their shortcomings and expects them to take decisive action.

The ECB intends to conduct a full review of banks' preparedness to manage climate and environmental risks in the first half of 2022. It also intends to integrate these risks into its methodology for the supervisory review and evaluation process and in its on-site inspection methodology, which will ultimately impact Pillar 2 capital requirements. The ECB will assess banks climate and environmental disclosures again at the end of 2022.

The report published on 14 March 2022 is available here.

The ECB press release is available here.