Climate change isn’t just an environmental issue—it’s a financial one too. European regulators now require banks to manage ESG risks as part of their core supervision. ESG stands for Environmental, Social, and Governance.
Under new guidelines from the EBA and ECB, banks must identify and assess how things like floods, droughts, carbon pricing, or social inequalities could affect their business model. They must include these risks in their internal capital adequacy assessments (ICAAP) and stress testing.
In 2022, the ECB completed its first climate risk stress test, and more exercises are coming. Banks are expected to improve their disclosures and integrate ESG into their governance frameworks.
More info can be found on the ECB website.
