In a speech given to an ECB-EBRD joint conference, central bank board member Frank Elderson, states: "None of the banks under our supervision meet all our expectations. All banks have several blind spots and may already be exposed to material climate risks. They are all still a long way off meeting the supervisory expectations we have laid out for them. And all banks need to catch up, as their climate risk undertakings will eventually influence their supervisory requirements."

The ECB has identified climate change as a key risk factor for the European banking sector in 2021. The latest edition of its Financial Stability Review suggests that around 80% of European banks are already exposed to climate-related physical risks.

Self-assessment questionaires distibuted by the ECB to banks in November are currently being benchmarked ahead of a full supervisory review next year that will ultimately influence banks’ Pillar 2 capital requirements. To give a sense of the magnituded of the exercise, the ECB expects to review plans covering €24 trillion of banking assets.

Says Elderson: "All in all, the great majority of European banks are not even close to where they should be - and they know it: 90% of reported practices are deemed by the banks themselves only partially or not at all aligned with the ECB’s supervisory expectations.

"More than half have no approach for assessing the impact of climate risks. This finding is made all the more striking by the fact that, of the 20% of the banks who do have a systematic way of assessing the climate risks, almost all find that climate risks are already having, or are about to have, a material impact on their risk profile.

"On top of this, only around 40% of banks have assigned explicit responsibility for managing climate risks to the management body - and of those, three in four do not report on climate risks to management. How can the management body manage the risks if they are not aware of them?"

Banks often claim that their lack of progress in incorporating climate risks into their risk management frameworks is due to the lack of available data. But, in reality, says Elderson, few banks have made any effort at all to take stock of what kind of data they would actually need to start accounting for climate risks.

"The ECB expects all banks to harness the fresh information that is available on climate risks and to start assessing the materiality of the climate risks they are facing," Elderson concludes. "There are risks to acting on the basis of partial data, but in the case of climate change, the risks of inaction are far greater."