The state of climate and environmental risk management in the banking sector – ECB publishes its assessment of 112 banks

Following on from the theme of Climate and Environmental (C&E) risks in banks and financial institutions, we are today covering some of the key findings from the ECB supervisory assessment that was published today, November 22nd 2021.

Today, the results were published – The state of climate and environmental risk management in the banking sector – Report on the supervisory review of banks’ approaches to manage climate and environmental risk. See the full report in the link below:

The state of climate and environmental risk management in the banking sector (

The ECB recently conducted a benchmarking exercise asking banks to self-assess their capabilities in relation to the recently published supervisory expectations. A first questionnaire was collected in February 2021 and a second in May. It was sent to 112 significant institutions that then conducted a self-assessment compared to the supervisory expectations published in November 2020. In summary, 90% of the banks deem their activities only partially, or not at all compliant with the ECB’s supervisory expectations.

A majority of the 112 institutions have performed a materiality assessment, but the ECB noted that for many institutions that stated that they were not materially exposed to climate and environmental risks, those very same institutions had not conducted a materiality assessment at all or performed one that had significant shortcomings.

In general, larger institutions have made better progress according to the report. It would also seem like current risk management practices are more sophisticated for capturing transition risk and less advanced for physical risk purposes. The report notes that many institutions have started off by collecting data and developing methodologies for transition risk purposes.

In August and September, a dialogue was held with each institution by JST’s. All institutions received a feedback letter and for some, a qualitative requirement will be communicated as part of the 2021 SREP. In 2022, the ECB will conduct a thematic review on the topic and a stress test, as C&E risks are integrated as part of the SREP methodology. Eventually this will impact banks’ Pillar 2 requirements.

Banks need to incorporate C&E risks within their ICAAP and ILAAP practices and demonstrate that they can embed C&E risks into their strategic planning and risk mitigation process. The report notes that only a few banks can embed these risks accordingly as part of their strategic planning process.

The following picture illustrates institutions alignment with the supervisory expectations.

As you can see, there are significant gaps across the board for market risk, stress testing, and liquidity risk and that the gaps are significant.

The next picture illustrates institutions’ timeliness, in terms of development plans, implying that banks plans are also somewhat behind the curve.

On a final note, the report tells us that institutions have made progress relating to their management body and governance arrangements, whereas progress has been much slower on risk appetite and risk reporting. Less than 15% of institutions have effectively integrated C&E risks as part of their risk reporting and less than 10% of institutions provided evidence that the oversight would be effective.

Few banks have the capability to utilise granular data to measure C&E risks at a physical asset level. The report cites one institution that can utilise geographical data to measure risk of flooding for mortgage and agricultural portfolios. This is something that probably constitutes best practice, illustrating how far behind most institutions are in this respect.

MORS Software is a pioneer in the field of scenario analysis for both stress testing and financial planning purposes. With our unique transaction-level data integration, MORS Software helps its clients monitor and manage climate related risks transparently, as the impact on credit, liquidity and market risk alike can be measured accordingly.

Would you like to know more how we at MORS Software can help you on the road to manage climate risks accordingly while meeting your supervisory obligations at the same time?

This article is one of many of our climate risk related articles.