The European Central Bank (ECB) announced its latest update to the compendium of good practices for climate and nature-related risks. These updates are available in two documents: the C&N Risk Management and Stress Testing reports. At a high level, the ECB believes that banks made substantial progress in climate and nature risk management over the past several years. However, they still see room for improvement, stating:
“Banks have improved their practices for managing climate and nature-related (C&N) risks in recent years. All banks under our supervision now have the foundational architecture in place to identify, quantify and manage the risks from the ongoing climate and nature crises. These improvements are not only vital for ensuring resilience but also enable banks to seize the business opportunities presented by the green transition, benefiting their competitiveness.
Notwithstanding this clear progress, more still needs to be done to ensure banks apply sound practices across all material portfolios, exposures and risk categories. The methods used, especially for measuring physical and nature-related risks, are still in their infancy with risks very likely being underestimated. Some bank-specific weaknesses also still need to be addressed.”
The ECB’s documents are intended to serve as tools for banks to leverage in updating their C&N risk management programs. The ECB found that nature-related risk management was particularly nascent, poorly understood, and underestimated. While the compendium of good practices is made specifically for banks, there are lessons to be gleaned for other industries as well. Climate and nature-related risks are only increasing, and robust risk management will be necessary to protect value.
Our members can learn more about risk management here.
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