DBRS Morningstar Comment: Climate Risk Will Be Part of Compliance Soon

DBRS Morningstar has released a commentary discussing the increasing focus on the impact of climate and environmental risks by bank regulatory authorities in Europe. In particular, we note that supervisory authorities have been releasing guidance on how supervised institutions should assess and manage those risks, and that they have communicated their intention to conduct stress testing exercises in coming quarters.

In our view, climate and environmental risks appear to be a potentially standalone category of prudential regulation in Europe and we expect the push for the prudential management of these types of risks to intensify in the coming quarters.

Key Highlights include:

• Authorities, such as the ECB and the EBA, have over the past few months provided insight on how climate and environmental risks are likely to be supervised going forward, through the release of draft guidance and the announcement of future stress testing.

• Local regulators, such as ACPR in France and the PRA in the United Kingdom, have also announced their intention to stress test climate risks on their supervised entities in the coming months.

• These developments are in line with international initiatives supported by regulators across the world, such as the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), and standard-setting bodies, such as the Bank of International Settlements (BIS).

“Climate and environmental risks are becoming an area of increased focus for bank regulatory authorities in Europe, as evidenced by the release of a draft guide on these risks by the ECB, but also by various local regulators’ intention to stress test these risks in coming quarters.

We recognise that there is still some uncertainty surrounding the stress-testing framework and the scenarios used, however, we consider that the current initiatives provide a foundation for the establishment of a climate-risk management framework in Europe and we expect regulators’ efforts to assess financial risks from this area will continue.” said Lito Chousiada, Assistant Vice President from DBRS Morningstar’ Financial Institutions team.

More details from DBRS here.

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