European Central Bank consults on Climate-related and Environmental Risks

Climate Change 3

The European Central Bank (ECB) has issued a consultation on its draft Guide on Climate-related and Environmental Risks (Guide).

Current prudential rules require European banks to identify, manage, and disclose all material risks to which they are exposed.  In this regard, the Guide explains how the ECB expects banks to safely and prudently manage climate-related and environmental risks. 

Banks are to consider climate-related and environmental risks in their governance and risk management frameworks. These risks are to be considered when formulating and implementing their business strategy.  Banks, in addition, are expected to enhance their climate-related and environmental disclosures.  

ShareAction, a United Kingdom-based charity championing responsible investment, recently ranked the 20 largest European banks based on how well they have aligned their strategies and risk management practices with the goals of the Paris Agreement. 

There have been equally notable developments in other jurisdictions, including the United Kingdom and Canada.

In December 2019, the Bank of England had published a discussion paper setting out its proposal for a 2021 Biennial Exploratory Scenario (BES) on climate-related risks. 

The objective of the BES, it notes, is to ‘test the resilience of the largest banks, insurers and the financial system to different possible climate pathways and provide a comprehensive assessment of the United Kingdom financial system’s exposure to climate-related risks.’  

In Canada, as part of measures to help businesses weather current economic downturn due to the COVID-19 pandemic, the Federal Government last week established a Large Employer Emergency Financing Facility (LEEFF).

A qualifying condition for the LEEFF is that recipient companies would be required to ‘commit to publishing annual climate-related disclosure reports consistent with the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), including on how their future operations will support environmental sustainability and national climate goals.’  The reasons for this annual disclosure requirement may not be far-fetched.

In its final report, issued in June 2019, the Expert Panel on Sustainable Finance had recommended that the Federal Government consider “endorsing a phased ‘comply-or-explain’ approach to adoption of the TCFD framework in Canada.” The Panel also recommended a formal integration of climate risks into the supervision of federally regulated financial institutions, with the Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI) leading the integration efforts.  

Perhaps in response to the integration mandate, in February 2020, the OSFI Superintendent indicated OSFI would be looking at ‘ways to further address the physical, liability and transition risks to the financial system that arise from climate change.’

Earlier, in May 2019, the Bank of Canada declared climate change as a key financial system vulnerability. In its 2020 Financial System Review, published last week, the Bank notes that it continues to analyze and conduct research on climate change and will be publishing its findings.

Back to the Guide, the ECB requires interested parties to submit comments for consideration by September 25, 2020.  Additional details are available here.

Photo Credit: Pixabay

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