Disclosing climate risks is a new aspect of regulation that banks are coming to terms with, but lenders need to act now to avoid falling further behind as regulators ramp up their focus on ESG issues.
Europe’s lenders were put under the spotlight recently when it was found that, for the second year running, lenders from the eurozone failed to meet the European Central Bank’s (ECB’s) expectations on climate risk disclosures.
The argument from banks is that they simply do not have the data available as their exposures are reliant on other parties such as corporates. But while that is a valid reason, it is not a valid excuse. Banks must find alternative solutions and get their data ready, otherwise they risk falling further behind as regulation of climate risks is set to become even stricter.
The ECB, for example, is understood to be considering climate risks in the context of its Supervisory Review and Evaluation Process and Pillar 2 decision-making. That would mean climate risks would impact banks’ capital requirements.
The US is also increasing its focus on climate risks, with a proposal by the Securities and Exchange Commission in March requiring public companies, including banks, to disclose climate-related risk that are likely to have a material impact on their business, operations or financial conditions.
Regulators are also increasingly turning to climate stress tests to assess how prepared banks are for dealing with financial and economic shocks stemming from climate risks.
An increased focus on banks’ climate risks should be welcomed, as climate risks are a major risk banks face, but it also means that banks need to act now on disclosing climate risks to avoid playing catch up and potentially being penalised. After all, what bank would want to be seen with a diminished environmental, social and governance reputation?
