Climate-related risks are featuring more prominently in banks’ risk management. To enable banks to manage these risks effectively, we have drawn up a Good Practice document providing guidance on integrating climate-related risks in banks’ governance, risk management and reporting. In a Q&A we have set out our interpretation of the way in which existing legislation applies to climate-related risk management.
Banks may be vulnerable to the physical consequences of climate change (physical risks) as well as to the consequences of a transition to a climate-neutral economy (transition risks). Given the potential impact of these climate-related risks, we expect banks to be able to analyse and describe the effect on their risk profile. Where risks are material, we expect banks to be able to control these risks just like any other conventional risk.
We conducted a public consultation on the Q&A and the Good Practice documentto canvas opinions on the fairness, effectiveness and desirability of these documents. This included a roundtable discussion with bank representatives organised in cooperation with the Dutch Banking Association. Our responses to the answers received are set out in the feedback statement.
Alignment with European developments
The Q&A and Good Practice document are in line with the European developments in this area. The ECB will include climate-related risks in consultations with the sector and expects to set out its supervisory expectations on this subject later in the year. The European Banking Authority is also mandated under Article 98(8) of the revised banking directive (CRD V) to assess the means by which Environmental, Social and Governance risks can be incorporated into the Supervisory Review and Evaluation Process (SREP).
The banking sector has an important role in mitigating the economic consequences of the coronavirus, for example by alleviating severe liquidity shortages, granting deferrals of interest and principal payments and providing emergency loans to businesses and private individuals. From a prudential perspective it is important that banks also maintain a long-term outlook in this crisis response and take the potential impact of climate-related risks into account in their risk assessment.