A Brief Summary

Frank Elderson, an executive member of the European Central Bank (ECB), has drafted a supervisory roadmap to tackle climate-related risks faced by European banks.

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While addressing an event organised by ECB banking supervisors, Elderson highlighted the need for the banks to use risk management instruments at their wish to address climate and environmental risks, including the holding of capital.

He said: "2022 will be the year that climate and environmental risks become integrated into the day-to-day activities of our joint supervisory teams. These risks will form an integral part of our ongoing dialogue with supervised entities and the supervisory review and evaluation process. This will ultimately influence banks’ minimum capital requirements.”

He warns that banks have a long way to go from where they are now, citing a study published last year, 90 per cent of their practices are only partially or not at all in line with the ECB supervisory expectations.

The ECB, according to Elderson, is not urging banks to divest fully from carbon-intensive industries or geographical regions susceptible to physical climate risk. However, “we do insist that these risks are managed appropriately, just like any other risk”, he said.

According to Elderson, Banks may manage climate and environmental risks by realigning portfolios, establishing defined risk appetites, implementing mitigation plans, tweaking qualitative credit criteria, and quantifying and retaining capital. They can also assist their clients in reducing and adjusting to these threats.

He further said planned modifications to the European Commission's capital requirements regulation and directive would encourage the inclusion of climate risks into the legislative framework of banking supervision while also requiring banks to establish transition plans. He also added that significant advancements in disclosure frameworks and taxonomies will aid in the closing of data gaps.

“On all these fronts, the sooner banks act, the smoother the transition will be for them and for the economy they help support,” he concluded.

Elderson, a Dutch lawyer and former executive director of supervision at De Nederlandsche Bank, was instrumental in the founding and quick expansion of the Network for Greening the Financial System, which he chaired until recently. He is vice-chair of the ECB's supervisory board and co-chair of the Basel Committee on Banking Supervision's Task Force on Climate-related Financial Risks, in addition to serving on the ECB's executive board.