Sustainability becoming ‘business as usualʼ for central bank supervisors

European banking supervisorsʼ work on sustainability risks was now “much more business as usual” and embedded in their everyday interactions with banks, according to Cindy van Oorschot, an executive board member at the De Nederlandsche Bank (DNB) the Dutch central bank.

Their work was mandate-driven, risk-based and apolitical, van Oorschot said, during a keynote at the Association for Financial Markets in Europe (AFME) Sustainability Conference in Amsterdam last month.

“I donʼt think that central banks work on this topic because they feel they need to push a certain political agenda, or they are idealists. No, we work on this because we feel that the risk from climate change and nature degradation is something that is within our mandate,” she said.

Tim Rawlings, co-head of the Bank of England climate hub, agreed that work on climate change was apolitical. Climate change was a risk to the Bank’s primary objective of maintaining financial stability, he said.

Physical risks were of particular concern, he added, so the Bank was developing a toolkit that would, among other things, help financial institutions to make “decision-relevant assessments of physical risks” of their clients’ businesses.  

41% at risk

According to data provider MSCI, a sample portfolio of 8,200 corporates showed a total of 450,000 operating locations in 200 countries, of which 41% were at risk from at least one nature-related risk, such as water scarcity.  

Rawlings said Bank of England guidance had been revised following requests from banks and insurers for more granularity. The initial high-level guidance from 2019 was being made consistent with the requirements of regulators in other countries, and was filling in some gaps, he added.

“[It will] feed into good, effective risk management that feeds into good pricing and good strategic decision making, so firms can grapple with challenges that are coming down the pipeline,” Rawlings said.

No going back

Dorota Wojnar, head of environmental, social and governance (ESG) risks at the European Banking Authority (EBA), said its guidelines were about managing risks. “Risk management is really a survival skill, and it is the necessary condition for banks to be able to carry out their business. And from the global perspective, it is the basis for financial stability,” she said.

“So it is not really about ticking the boxes and about showing compliance. This is really about the necessary primary function of the banks to be able to effectively manage material risks.”

The view of sustainability risk as just another risk central to a bank’s survival was taking root: Wojnar said that, at recent risk conferences, she had been gratified to see banks discuss ESG risk alongside other critical risks.

Sustainability was being integrated into banksʼ core risk functions, said van Oorschot. “Within the financial sector, we don’t have any heads of sustainability any more. No, this is all integrated into work that is being done by the [chief financial officer] and [chief risk officer]. So it is ‘business as usual’,” she said.

In response to a question from the audience, Wojnar said there would be no delay to the introduction of the guidelines — the principle-based guidelines built on the European Central Bank (ECB)’s guide, which larger banks have already spent three years implementing.

“The guidelines are phrased [to] allow institutions to tailor the specific solutions in a way that is suitable for their specific business, the specific risk profile, but also the specific circumstances around data availability, taking into account various potential sources of data,” she added.