EACB comments on BCBS Principles for the effective management and supervision of climate-related financial risks

We appreciate the choice to address the matter following a principle-based approach rather than with more detailed standards. The consistent integration of climate-related risks in supervision and the overall prudential domain and governance framework passes necessarily through a learning phase and it cannot disregard the experiences being matured at jurisdictional level.
We also appreciate the explicit reference that the principles are to be applied on a proportionate basis depending on the size, complexity and risk profile of the bank or banking sector, including the fact that “Banks should manage climate-related financial risks in a manner that is proportionate to the nature, scale and complexity of their activities and the overall level of risk that each bank is willing to accept.”
A proportionate approach is particularly necessary when looking at tools like scenario analysis and stress testing: while these can certainly help to model climate risk impacts, it should be considered that more time will be needed to learn how to translate scenarios into losses. Not being able to rely on historical series makes it difficult to set assumptions on how climate scenarios impact the results of companies. Standardised solutions could be of help particularly where banks have fewer resources to develop internal approaches.
We would also like to stress that climate risks can only be integrated in the risk management and supervision by reflecting them in the existing components of the supervisory dialogue, i.e. looking at business model and governance, and risks to capital and liquidity but as stemming from the known categories of credit, market and operational risk and not as separate risk categories.
It is also essential to ensure that the expectations for climate risks are consistent with the existing regulatory framework, and that the incentives/disincentives are properly aligned. The transition to a climate-friendly economy will be the challenge of the century and banks will play a central role to finance this massive endeavour.