Sustainable finance: European Commission and European Central Bank consult on climate-related risks and a new strategy on adaptation to climate change

European Central Bank further articulates expectations on climate and environmental risks

On 20 May 2020, the European Central Bank (ECB) published for consultation purposes a draft guide outlining its expectations for banks to integrate climate and environmental risks into their operational strategies, governance, risk management and communications. The consultation’s purpose is to raise industry awareness of climate-related and environmental risks and to improve the management of such risks. This consultation is part of the efforts made by the ECB in the Central Banks and Supervisors Network for Greening the Financial System (NGFS).

The guide aims to cultivate banks’ preparedness for managing climate-related and environmental risks under current prudential rules, in accordance with the European Commission’s action plan on financing sustainable growth and the European Banking Authority’s action plan on sustainable finance.

The ECB defines the scope of its supervisory expectations in two key pillars:

  • Business models and strategy: Institutions are expected to understand the impact of climate-related and environmental risks on their business environment and to integrate them into their overall business strategy.
  • Risk management: Institutions are expected to integrate climate-related and environmental risks into their risk management framework, credit risk management, operational risk management, market risk management, scenario analysis and stress testing, liquidity risk management and disclosures, policies and procedures.

The ECB will use the expectations set out in the draft guide in its supervisory dialogue with significant banks. Therefore, these banks are expected to assess the extent to which their current management and disclosure of climate-related and environmental risks are safe and prudent in light of these expectations. Where required, the ECB will also expect these banks to promptly begin adapting their practices.

National competent authorities are, however, recommended to apply these expectations proportionately when supervising less significant institutions.

European Commission launches publication consultation on new EU strategy on adaptation to climate change

As part of the European Green Deal, on 14 May 2020, the European Commission launched an online public consultation on a new Adaptation Strategy.

Climate change is no longer a remote problem for future generations—it has already borne devastating effects on people, the planet and prosperity. Without drastic emission reduction measures, climate change will continue to increase the likelihood of severe, pervasive and irreversible consequences. As a result, the European Commission has set as a core objective to its strategy the achievement of carbon neutrality across the European Union level by 2050.

The European Commission has underlined that, by promoting global adaptation action together with accelerated emissions reductions, the EU can help ensure the welfare of its citizens; safeguard the natural environment and cultural heritage; and shield economic investments and assets. The recovery from the current crisis will also be an opportunity to build a more resilient society.

To build a financial system that supports sustainable growth, the European Commission has increasingly been including measures related to sustainable finance. Under the Action Plan “Financing Sustainable Growth” published in 2018, the European Commission presented proposals for regulations on specific topics to build a common understanding around sustainability and sustainable finance:

  • A framework to facilitate sustainable investment (Taxonomy Regulation);
  • A disclosure framework around sustainable investments and sustainability risks; and 
  • A new set of Climate Benchmarks. 

Intending to build on the 2013 “Adaptation Strategy”, this new demonstration aims to boost efforts to deal with climate risks; increase resilience; integrate climate into risk management practices; and intensify prevention and preparedness for climate change by 2050. This new strategy will also include an extra-European dimension to support adaptation efforts at the global level. The feedback period will end on 20 August 2020.

The European Commission reminds that a related initiative on the European Climate Pact is also running an open public consultation in parallel.

The envisioned next steps are the establishment of an observatory to identify health and social risks linked to climate change; more open access to climate risk data from private and public sources; and greater attention to the development and deployment of adaptation solutions as part of the Horizon Europe research program and other EU funds.

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Regulatory News Alert, May 28, 2020