Considerable room for improvement in dealing with climate-related and environmental risk in medium-sized and small Dutch banks

ECB Guide on climate-related and environmental risks for banks

Since 2021, DNB has applied the ECB Guide on climate-related and environmental risks for banks in its prudential supervision of banks. The Guide describes 13 supervisory expectations on how banks should formulate and implement climate-related and environmental risks in their business strategies, governance, risk management and disclosures.

Results of the 2021 study

We asked a total of 22 medium-sized and small banks to complete a self-assessment consisting of a materiality assessment, a survey on meeting supervisory expectations and an action plan. We then analysed and evaluated these self-assessments. The results of our analysis show that all banks could step up their efforts and improve the identification, measurement and management of climate-related and environmental risks. The results are similar to those published by the ECB, who conducted the same study for significant banks in 2021: “The state of climate and environmental risk management in the banking sector”.

Materiality assessment below par

The small group of banks that conducted a materiality assessment consider the materialisation of climate-related and environmental risks through credit risk most likely in the long term (see Figure 1). For most of these banks, however, the materiality assessment cannot be considered sufficiently sound and comprehensive.

No bank meets all supervisory expectations

The analysis also shows that almost all banks recognise climate-related and environmental risks, but that they still have a long way to go in order to meet all 13 expectations (see Figure 2). On average, banks score best on the expectations regarding scenario analysis and stress testing.

Action plans needs improvement

Most banks have developed plans to improve the identification, measurement and management of climate-related and environmental risks. However, in most cases we assessed these plans as inadequate or partially inadequate.

Follow-up in 2022

In 2022 we will continue our dialogue with the banks and encourage them to make progress in identifying and managing climate-related and environmental risks.