Extreme meteorological events are occurring more and more frequently, and although many sectors have taken action, not all have taken action. One of them is banking. About 60% of banking institutions do not have strong stress testing frameworks on climate risk and they do not have enough data on this subject. That’s the main conclusion the Bank of Spain drew from its climate stress test, but it’s not the only conclusion. Collectively, almost two-thirds of the revenues of organizations from non-financial business customers came from industries with a limited number of large counterparties and high greenhouse gas emissions. transition risks In a speech on sustainable finance, Mercedes Olano, Managing Director of Audit at the Bank of Spain, said, “Overall, organizations do not appear to be sufficiently prepared to comply with information requirements regarding climate and environmental risks.”
The test conducted by the European Central Bank (ECB) also revealed that most institutions do not consider this risk in their credit risk models. Actually, only 20% take this variable into account when lending. According to the regulator, less than 10% of organizations use detailed and forward-looking information to manage climate and environmental risks. “Practically all organizations should strive to develop more complex methodologies based on more detailed information that enables them to achieve an acceptable coverage of major portfolios, geographic areas and risk factors,” explains Olano. The regulator says the problem is that some organizations are starting to use transition planning tools to improve their business models over the long term, but a “wait and see” approach continues to dominate.
Not everything is negative. The ECB stressed that progress is being observed. more than 80% Banking institutions recognizing that climate risks significantly affect risk profiles and strategies and 70% consider risk significant within the three to five-year business planning horizon. Progress has also been made on enterprise architecture to tackle this issue. The stress test shows that more than 85% of banks have core applications in many of the areas the central bank’s prospects are addressing, although “significant gaps remain to be observed.” About 10% of the 135 participating organizations “lagged behind and did not make material progress over the past year.”
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Supervisors expect banks to accelerate the development of transition strategies with specific objectives and to identify all risks associated with the implementation of the different phases identified to comply with the latest regulations. Thus, the first period ended in March of this year and required organizations to have a classification of climate-related and environmental risks and a full assessment of their impact on their operations. By the end of 2023, banks should incorporate these risks into their governance, strategy and risk management, and Full compliance will be mandatory by the end of 2024 All supervisory expectations, including those related to the internal capital adequacy assessment process and stress testing
In November 2022, the Corporate Sustainability Reporting Directive (CSRD) came into effect. companies equate information about sustainability with information about financial information. The Bank of Spain hopes that once implemented, it will “help lenders collect data on counterparties’ ESG aspects”. The Basel Committee has also included financial risks related to climate change in its work plan, and the European Banking Authority (EBA) has published its roadmap that includes various aspects related to climate risks.