TOPIC

SUBTOPIC

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EXPECTATIONS

Business models and strategy

Business Environment

1

Institutions are expected to understand the impact of climate-related and environmental risks on the business environment in which they operate, in the short, medium and long term, in order to be able to make informed strategic and business decisions.

Business Strategy

2

When determining and implementing their business strategy, institutions are expected to integrate climate-related and environmental risks that materially impact their business environment in the short, medium or long term.

Governance and risk appetite

Management Body

3

The management body is expected to consider climate-related and environmental risks when developing the institution’s overall business strategy, business objectives and risk management framework and to exercise effective oversight of climate-related and environmental risks.

Risk Appetite

4

Institutions are expected to explicitly include climate-related and environmental risks in their risk appetite framework.

Organizational Structure

5

Institutions are expected to assign responsibility for the management of climate-related and environmental risks within the organisational structure in accordance with the three lines of defence model.

Reporting

6

For the purposes of internal reporting, institutions are expected to report aggregated risk data that reflect their exposures to climate-related and environmental risks with a view to enabling the management body and relevant sub-committees to make informed decisions.

Risk Management

Risk Management Framework

7

Institutions are expected to incorporate climate-related and environmental risks as drivers of established risk categories into their existing risk management framework, with a view to managing and monitoring these over a sufficiently long-term horizon, and to review their arrangements on a regular basis. Institutions are expected to identify and quantify these risks within their overall process of ensuring capital adequacy.

Credit Risk Management

8

In their credit risk management, institutions are expected to consider climate-related and environmental risks at all stages of the credit-granting process and to monitor the risks in their portfolios.

Operational Risk Management

9

Institutions are expected to consider how climate-related events could have an adverse impact on business continuity and the extent to which the nature of institutions’ activities could increase reputational and/or liability risks.

Market Risk Management

10

Institutions are encouraged to monitor on an ongoing basis the effect of climate-related and environmental factors on their current market risk positions and future investments, and to develop stress-testing scenarios that incorporate climate-related and environmental risks.

Scenario Analysis and Stress Testing

11

Institutions with material climate-related and environmental risks are expected to evaluate the appropriateness of their stress testing, with a view to incorporating them into their baseline and adverse scenarios.

Liquidity Risk Management

12

Institutions are expected to assess whether material climate-related and environmental risks could cause net cash outflows or depletion of liquidity buffers and, if so, incorporate these factors into their liquidity risk management and liquidity buffer calibration

Disclosures

Disclosure policies and procedures

13

For the purposes of their regulatory disclosures, institutions are expected to publish meaningful information and key metrics on climate-related and environmental risks that they deem to be material, as a minimum, in line with the European Commission’s Guidelines on non-financial reporting: Supplement on reporting climate-related information.

A&M ACTIONABLE ACTIONS

Strategy

• Develop an ESL-specific strategy, as per ECB expectations and EBA requirement, to include ESL-related business strategy and risk management, and integrate ESL into business plans, internal control and decision-making processes
• Ensure bank’s post-covid strategies are in line with these ESL actions

Processes & Organization Structure

• Upgrade and restructure risk processes and procedures, including definitions and taxonomy
• Develop specific ESL policies & procedures
• Adjust organization to align climate with other non-financial risks; analyze implications in reputational risks; review business vs. risks structure

Measurement

• Upgrade existing climate risk modeling to include (i) Physical and transition risks; (ii) Exposures & provisions
• Review post-covid vs. ESL risks by sectors, to analyze sectors that will be highly impacted by both risks
• Develop/ upgrade forward looking tools to contemplate: (i) Sensitivity analysis, (ii) Stress testing under different scenarios and (iii) Benchmarking analysis

Capital Optimization

• Analyze capital-related regulatory benefits and/or penalties (SREP, stress test, green supporting and brown penalizing factors, CRR amendments capital requirements, collaterals, Basel IV, etc.)
• Upgrade capital planning tools to integrate climate-relate projections on P&L, balance sheet and capital impacts
• Create benchmarking analysis

Reporting & Disclosures

• Revamp internal and external regulatory reporting, in line with ECB expectations and market best practices (internal committees, RTS, CRR / IFR)