Banks are falling short on climate disclosures, says ECB, despite improvement underway
The European Central Bank (ECB) highlights the need for immediate action in an updated assessment of progress made by European banks on disclosing climate and environmental risks. While there have been improvements since its first assessment in late 2020, the ECB says that no bank fully meets its supervisory expectations.
With disclosure requirements set to increase in coming years, “banks therefore need to adjust their practices without delay,” says the ECB. Compared with 2020, more banks now disclose meaningful information on climate and environmental risks, but significant gaps remain and the overall level of transparency is still insufficient. Numerous interesting statistics back up this assessment; for example, only around 50% of European banks publish key performance or risk indicators on climate and environmental risks.
However, the report also identifies good practices, which it says confirm the sector’s ability to adjust. “For example, one bank aiming for net zero emissions in its portfolio by 2050 published several interim targets and the progress made toward them, as well as underlying methodologies and scenarios. Also, some banks disclose dashboards on the performance of their loan books in various transition sectors, such as power generation, oil and gas, or automotive, using a science-based transition pathway.”
The ECB has sent individual feedback letters to banks setting out its expectations for improvement, and will carry out a further review at the end of the year. It notes that it is carrying out several climate-related supervisory activities during 2022, including its first ever climate risk stress test. “In parallel, the ECB is gradually integrating climate and environmental risks into its regular supervisory methodology.”
A speech by Frank Elderson, Member of the Executive Board and Vice-Chair of the Supervisory Board of the ECB, accompanied the publication of the report. In this, he urges meaningful disclosures over noise. “Banks can and must do much better to improve the quality of their disclosures, and they need to do it quickly,” he says.
{Ed: There needs to be more joined-up policy making in this area! Banks will need to continue to make educated guesses about the ESG risks contained in many, if not most of their exposures to portfolio companies until such time as corporate reporting rules include mandatory, digital, comparable – and ideally audited – ESG disclosures. In an EU context it should be especially concerning for banks, private equity firms and other users of these reports that the current Parliamentary and Council positions on larger private company disclosure are to remove the proposals to include ESEF (Inline XBRL) obligations. This is where the great volume of lending and risk exists; banks will simply be unable to rekey corporate ESG reporting metrics for the tens of thousands of private companies that they are lending to. The costs associated with this type of digital disclosures will be modest. The benefits to lenders, investors, regulators and policy makers will be immense. It’s the 21st century. Let’s leave paper-thinking behind.}
