9. Which Role for the Prudential Supervision of Banks in Sustainable Finance?

European Banking Authority (2019), Action Plan on Sustainable Finance.

European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”.

Network for Greening the Financial System (2020), “Overview of Environmental Risk Analysis by Financial Institutions”.

Network for Greening the Financial System (2020), “Overview of Environmental Risk Analysis by Financial Institutions”; Basel Committee on Banking Supervision (2020), “Climate-related financial risks: a survey on current initiatives”.

Campiglio E., Dafermos Y., Monnin P., Ryan-Collins J., Schotten G., Tanaka M. (2018). “Climate Change Challenges for Central Banks and Financial Regulators”. Nature Climate Change, 8, 462–468; Alexander (2016), “Greening Banking Policy”, available at http://​unepinquiry.​org/​wp-content/​uploads/​2016/​09/​10_​Greening_​Banking_​Policy.​pdf (accessed in September 2020).

European Banking Authority (2019), “Report on undue short-term pressure from the financial sector on corporations”.

Sustainable Banking Network (2019), “Global Progress Report of the Sustainable Banking Network Innovations in Policy and Industry Actions in Emerging Markets”; Sustainable Banking Network (2020), “Necessary Ambition: How Low-Income Countries Are Adopting Sustainable Finance to Address Poverty, Climate Change, and Other Urgent Challenges”; Cambridge University (2014), “Stability and Sustainability in Banking Reform – Are Environmental Risks missing in Basel III?”.

See European Parliament resolution of 28 November 2019 on the climate and environment emergency (2019/2930(RSP)).

Elderson, F. (2019). “Are we doing enough? Keynote speech by Mr Frank Elderson, Executive Director of Supervision of the Netherlands Bank, at the European Insurance and Occupational Pensions Authority (EIOPA) 9th Annual Conference, Frankfurt am Main, 19 November 2019”, available at https://​www.​bis.​org/​review/​r191122j.​htm.

See Commission Regulation EU No 389/2013 establishing a Union Registry pursuant to Directive 2003/87/EC of the European Parliament and of the Council, Decisions No 280/2004/EC and No 406/2009/EC of the European Parliament and of the Council and repealing Commission Regulations (EU) No 920/2010 and No 1193/2011.

See Article 2 of the Paris Agreement, in particular paragraph 1(a) and (c).

Intergovernmental Panel on Climate Change (2014), “Climate Change 2014 Synthesis Report. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change”, available at https://​www.​ipcc.​ch/​site/​assets/​uploads/​2018/​02/​SYR_​AR5_​FINAL_​full.​pdf (accessed in September 2020); Intergovernmental Panel on Climate Change (2018), “Global warming of 1.5°C. An IPCC Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty”, available at https://​www.​ipcc.​ch/​site/​assets/​uploads/​sites/​2/​2019/​06/​SR15_​Full_​Report_​High_​Res.​pdf (accessed in September 2020).

There is, e.g. an operational risk element connected to the possibilities that banks’ assets and infrastructures are directly affected by the adverse effects of climate change. See below, Sect. 9.5.4.

Organisation for Economic Cooperation and Development (2015), “Divestment and Stranded Assets in the Low-carbon Transition- Background paper for the 32nd Round Table on Sustainable Development 28 October 2015 OECD Headquarters, Paris”, edited by Baron, Richard and Fischer, David; European Systemic Risk Board (2020), “Positively green: Measuring climate change risks to financial stability”; European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”.

Some still question in full or part the general consensus in the scientific community, or point to the fact that the possible negative side-effects of the strategies pursued to achieve a reduction in Greenhouse Gases (GHG) reduction may actually overcompensate the benefits achieved (Vidal O., Goffé B., Arndt N. (2013), “Metals for a low-carbon society”. Nature Geoscience 6,894–896; Mariutti E., (2020) “La grande eresia: la rivoluzione verde è un’enorme fake news?”. Econopoly https://​www.​econopoly.​ilsole24ore.​com/​2020/​11/​11/​rivoluzione-verde-fake-news/​?​uuid=​96_​VO67c4cb. Accessed in November 2020).

“If there are 1 million species on the way out with the sixth mass extinction the real question is whether Homo Sapiens are going to be part of the next wave of extinction”, as it has been effectively put by H. Bruyninckx, executive director of the European Environment Agency in his contribution to the hearing of the European Parliament Committee on Environment, Public Health and Food Safety, available at https://​multimedia.​europarl.​europa.​eu/​en/​committee-on-environment-public-health-and-food-safety_​20210114-0900-COMMITTEE-ENVI_​vd (accessed in January 2021).

Some identify a third transmission channel distinct from the other two, e.g. “liability risks”: e.g. Carney M. (2015), “Breaking the Tragedy of the Horizon – climate change and financial stability”. https://​www.​bankofengland.​co.​uk/​-/​media/​boe/​files/​speech/​2015/​breaking-the-tragedy-of-the-horizon-climate-change-and-financial-stability.​pdf?​la=​en&​hash=​7C67E78565186245​7D99511147C7424F​F5EA0C1A Accessed in September 2020. Most commentators tend however to include liability risks in the broader category of “physical risks”; ex multis: Network Green Financial System (2018), “First progress report”; European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”; European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”; European Systemic Risk Board (2020), “Positively green: Measuring climate change risks to financial stability”.

Network for Greening the Financial System (2018), “First progress report”.

Network for Greening the Financial System (2018), “First progress report”.

European Commission (2017), “Communication from the Commission — Guidelines on non-financial reporting (methodology for reporting non-financial information (C/2017/4234)”.

European Systemic Risk Board (2016), “Too late, too sudden: Transition to a low-carbon economy and systemic risk”, Report of the Advisory Scientific Committee No 6 / February 2016, available at https://​www.​bis.​org/​review/​r200804g.​htm (accessed in September 2020).

Aglietta, M., Espagne, É. (2016). “Climate and Finance Systemic Risks, More Than an Analogy? The Climate Fragility Hypothesis”, available at http://​www.​cepii.​fr/​PDF_​PUB/​wp/​2016/​wp2016-10.​pdf; Ashford, N.A. (2007), “The Legacy of the Precautionary Principle In US Law: The Rise of Cost Benefit Analysis and Risk Assessment as Undermining Factors in Health, Safety and Environmental Protection”, in De Sadeleer N. (ed.), Implementing the Precautionary Principle Approaches from the Nordic Countries, EU and USA, 352–378; European Commission (2000), “Communication from the Commission on the Precautionary Principle. COM(2000) 1 Final.”; Haldane, A. (2013). “Why Institutions Matter (More Than Ever)”, available at https://​www.​bankofengland.​co.​uk/​speech/​2013/​why-institutions-matter-now-more-than-ever (accessed in September 2020).

Forster Lloyd, W. (1832), “Two Lectures on the Checks to Population”, available at https://​en.​wikisource.​org/​wiki/​Two_​Lectures_​on_​the_​Checks_​to_​Population (accessed in September 2020); Hardin, G. (1968), “The Tragedy of the Commons”. Science, 162, 1243–1248; Elinor Olstrom won however the Nobel Prize in 2009 for showing that when natural resources are jointly used by their users, in time, rules are established for how these are to be cared for and used in a way that is both economically and ecologically sustainable, although her studies were conducted in small, local communities.

Carney, M. (2015), “Breaking the Tragedy of the Horizon—Climate Change and Financial Stability”, available at https://​www.​bankofengland.​co.​uk/​-/​media/​boe/​files/​speech/​2015/​breaking-the-tragedy-of-the-horizon-climate-change-and-financial-stability.​pdf?​la=​en&​hash=​7C67E78565186245​7D99511147C7424F​F5EA0C1A (accessed in September 2020).

Aglietta, M., Espagne, É. (2016). “Climate and Finance Systemic Risks, More Than an Analogy? The Climate Fragility Hypothesis”, available at http://​www.​cepii.​fr/​PDF_​PUB/​wp/​2016/​wp2016-10.​pdf; Riso, A.L., Lackhoff, K. (2020), “Dividend Recommendation”, in Lackhoff K. (ed.), Banking Supervision and Covid-19. Nomos Verlag.

Enria, A. (2020), “ECB Banking Supervision’s Approach to Climate Risks—Keynote Speech by Andrea Enria, Chair of the Supervisory Board of the ECB, at the European Central Bank Climate and Environmental Risks Webinar”, available at https://​www.​bankingsupervisi​on.​europa.​eu/​press/​speeches/​date/​2020/​html/​ssm.​sp200617~74d8539​eda.​en.​html (accessed in September 2020).

Alexander, S.K., Fisher, P. (2018), “Banking Regulation and Sustainability”, available at http://​dx.​doi.​org/​10.​2139/​ssrn.​3299351 (accessed in September 2020).

Cambridge University (2014), “Stability and Sustainability in Banking Reform—Are Environmental Risks Missing in Basel III?”.

D’Orazio, P., Popoyan, L. (2018), “Fostering Green Investments and Tackling Climate Related Financial Risks: Which Role for Macroprudential Policies?” Ruhr Economic Papers, No. 778, available at http://​dx.​doi.​org/​10.​4419/​86788906 (accessed in September 2020); Weitzman, M. (2013), “The Geo-Engineered Planet”. In Palacios-Huerta I. (ed.), One Hundred Years, 145–164.

In February 2019, the EBA received a call for advice from the Commission, as part of the Commission’s action plan on sustainable finance, see European Commission (2018), “Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions - Action Plan: Financing Sustainable Growth (COM/2018/097 final)”.

European Banking Authority (2019), “Report on undue short-term pressure from the financial sector on corporations”.

Enria, A. (2020), “ECB Banking Supervision’s Approach to Climate Risks—Keynote Speech by Andrea Enria, Chair of the Supervisory Board of the ECB, at the European Central Bank Climate and Environmental Risks Webinar”, available at https://​www.​bankingsupervisi​on.​europa.​eu/​press/​speeches/​date/​2020/​html/​ssm.​sp200617~74d8539​eda.​en.​html (accessed in September 2020); Alexander, S.K., Fisher, P. (2018), “Banking Regulation and Sustainability”, available at http://​dx.​doi.​org/​10.​2139/​ssrn.​3299351 (accessed in September 2020).

Lagarde, C. (2020), “Climate Change and the Financial Sector—Speech by Christine Lagarde, President of the ECB, at the launch of the COP 26 Private Finance Agenda”, available at https://​www.​ecb.​europa.​eu/​press/​key/​date/​2020/​html/​ecb.​sp200227_​1~5eac0ce39a.​en.​html (accessed in September 2020).

European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”.

Bouwma, I., Gerritsen, A., Kamphorst, D., Kistenkas, F. (2015), “Policy Instruments and Modes of Governance in Environmental Policies of the European Union”, available at https://​edepot.​wur.​nl/​373629 (accessed in September 2020).

The ECB, the Federal Reserve (FED), the Bank of England (BoE), the Bank of Japan (BoJ) and other central banks of s.c. ‘advanced economies’ have preferred to use in the most recent decades the reference interest rate as main monetary policy instrument, allowing a better control on the interbank lending rate. The use of reserves by the central bank as a constraint to certain types of lending would be incompatible with the objective of stable interbank lending rates, as these depend on the central bank’s ability to satisfy any demand of reserves from the banking market, especially in case of liquidity stress: see Campiglio, E., Dafermos, Y., Monnin, P., Ryan-Collins, J., Schotten, G., & Tanaka, M. (2018), “Climate Change Challenges for Central Banks and Financial Regulators”. Nature Climate Change, 8, 462–468). See also Cullen, J. (2018), “After ‘HLEG’: EU Banks, Climate Change Abatement and the Precautionary Principle”. Cambridge Yearbook of European Legal Studies, 20, 61–87.

Schnabel, I. (2020), “When Markets Fail—The Need for Collective Action in Tackling Climate Change—Speech by Isabel Schnabel, Member of the Executive Board of the ECB, at the European Sustainable Finance Summit, Frankfurt am Main, 28 September 2020”, available at https://​www.​ecb.​europa.​eu/​press/​key/​date/​2020/​html/​ecb.​sp200928_​1~268b0b672f.​en.​html (accessed in September 2020).

Aglietta, M., Espagne, É. (2016). “Climate and Finance Systemic Risks, More Than an Analogy? The Climate Fragility Hypothesis”, available at http://​www.​cepii.​fr/​PDF_​PUB/​wp/​2016/​wp2016-10.​pdf (accessed in September 2020).

European Systemic Risk Board (2016), “Too late, too sudden: Transition to a low-carbon economy and systemic risk”, Report of the Advisory Scientific Committee No 6 / February 2016, available at https://​www.​bis.​org/​review/​r200804g.​htm (accessed in September 2020).

Alexander, S.K. (2016), “Greening Banking Policy”, available at http://​unepinquiry.​org/​wp-content/​uploads/​2016/​09/​10_​Greening_​Banking_​Policy.​pdf (accessed in September 2020); Volz, U. (2017), “On the Role of Central Banks in Enhancing Green Finance”, available at http://​unepinquiry.​org/​wp-content/​uploads/​2017/​02/​On_​the_​Role_​of_​Central_​Banks_​in_​Enhancing_​Green_​Finance.​pdf (accessed in September 2020).

Enria, A. (2020), “ECB Banking Supervision’s Approach to Climate Risks—Keynote Speech by Andrea Enria, Chair of the Supervisory Board of the ECB, at the European Central Bank Climate and Environmental Risks Webinar”, available at https://​www.​bankingsupervisi​on.​europa.​eu/​press/​speeches/​date/​2020/​html/​ssm.​sp200617~74d8539​eda.​en.​html (accessed in September 2020).

Fraisse, H., Lé, M., Thesmar, D. (2017), “The Real Effects of Bank Capital Requirements”, ESRB Working Paper Series No 47/June 2017; Volz, U. (2017), “On the Role of Central Banks in Enhancing Green Finance”, available at http://​unepinquiry.​org/​wp-content/​uploads/​2017/​02/​On_​the_​Role_​of_​Central_​Banks_​in_​Enhancing_​Green_​Finance.​pdf (accessed in September 2020).

High Level Expert Group on Sustainable Finance (2018), “Financing a Sustainable European Economy. Final Report 2018 by the High-Level Expert Group on Sustainable Finance”; Dombrovskis, V. (2019), “Keynote Speech of Vice-President Valdis Dombrovskis on Challenges and Impacts of Implementing Basel III”, available at https://​ec.​europa.​eu/​commission/​presscorner/​detail/​en/​SPEECH_​19_​6269 (accessed in September 2020).

Carney, M. (2015), “Breaking the Tragedy of the Horizon—Climate Change and Financial Stability”, available at https://​www.​bankofengland.​co.​uk/​-/​media/​boe/​files/​speech/​2015/​breaking-the-tragedy-of-the-horizon-climate-change-and-financial-stability.​pdf?​la=​en&​hash=​7C67E78565186245​7D99511147C7424F​F5EA0C1A (accessed in September 2020); Alexander, S.K., Fisher, P. (2018). “Banking Regulation and Sustainability”, available at http://​dx.​doi.​org/​10.​2139/​ssrn.​3299351 (accessed in September 2020).

European Central Bank (2020), “Eurosystem reply to the European Commission’s public consultations on the Renewed Sustainable Finance Strategy and the revision of the Non-Financial Reporting Directive”; Boot, A., & Schoenmaker, D. (2018), “Climate Change Adds to Risk for Banks, but EU Lending Proposals Will Do More Harm Than Good”, Bruegel, available at https://​www.​bruegel.​org/​2018/​01/​climate-change-adds-to-risk-for-banks-but-eu-lending-proposals-will-do-more-harm-than-good/​ (accessed in September 2020); Matikainen, S. (2017). “Green Doesn’t Mean Risk-Free: Why We Should Be Cautious About a Green Supporting Factor in the EU”, available at https://​www.​lse.​ac.​uk/​granthaminstitut​e/​news/​eu-green-supporting-factor-bank-risk/​ (accessed in September 2020).

Network for Greening the Financial System (2020), “A Status Report on Financial Institutions’ Experiences from working with green, non-green and brown financial assets and a potential risk differential”.

Given certain premises and the existence of certain constraints, it has been interestingly noted that certain assets on the banks’ balance sheets could behave similarly to “Giffen Good”, i.e. banks may actually have an incentive to hold more of these goods when their capital requirements risk weighting increases, see Corrias, R., & Neumann, T. (2015), “Are Mortgages Like Potatoes? Unintended Consequences in a World of Many Constraints”, available at https://​bankunderground.​co.​uk/​2015/​07/​30/​are-mortgages-like-potatoes-unintended-consequences-in-a-world-of-many-constraints/​#more-393 (accessed in September 2020).

Bank for International Settlements (2020), “The green swan Central banking and financial stability in the age of climate change”; Network for Greening the Financial System (2018), “First progress report”; Network for Greening the Financial System (2019), “A call for action Climate change as a source of financial risk”.

Network for Greening the Financial System (2019), “A call for action Climate change as a source of financial risk”; Basel Committee on Banking Supervision (2020), “Climate-related financial risks: a survey on current initiatives”.

Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (the s.c. Taxonomy Regulation).

European Central Bank (2020), “Eurosystem reply to the European Commission’s public consultations on the Renewed Sustainable Finance Strategy and the revision of the Non-Financial Reporting Directive”.

European Systemic Risk Board (2020), “Positively green: Measuring climate change risks to financial stability”. First, very limited attempts to conduct backward-looking studies on a potential risk differential between brown and green assets failed to reach strong conclusions: Network for Greening the Financial System (2020), “A Status Report on Financial Institutions’ Experiences from working with green, non-green and brown financial assets and a potential risk differential”.

Elderson, F. (2019), “We All Play a Vital Role, Keynote Speech by Mr Frank Elderson, Executive Director of Supervision of the Netherlands Bank, at the International Capital Markets Conference, Frankfurt am Main, 30 August 2019”, available at https://​www.​bis.​org/​review/​r190904c.​htm (accessed in September 2020).

European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”.

Network for Greening the Financial System (2020), “Overview of Environmental Risk Analysis by Financial Institutions”.

G20 Green Finance Study Group (2017), “G20 Green Finance Synthesis Report”.

Network for Greening the Financial System (2020), “Overview of Environmental Risk Analysis by Financial Institutions”.

Network for Greening the Financial System (2019), “A call for action Climate change as a source of financial risk”; De Nederlandse Bank N.V. (2017), “Waterproof - An exploration of climate-related risks for the Dutch financial sector”.

G20 Green Finance Study Group (2017), “G20 Green Finance Synthesis Report”.

Task Force on Climate-Related Financial Disclosure (2017), “Recommendations of the Task Force on Climate-Related Financial Disclosure”.

Network on Greening the Financial System (2020), “A Status Report on Financial Institutions’ Experiences from working with green, non- green and brown financial assets and a potential risk differential”.

European Systemic Risk Board (2016), “Too late, too sudden: Transition to a low-carbon economy and systemic risk”, Report of the Advisory Scientific Committee No 6 / February 2016, available at https://​www.​bis.​org/​review/​r200804g.​htm (accessed in September 2020).

Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups (the s.c. non-financial reporting directive).

See European Parliament resolution of 6 October 2016 on International Financial Reporting Standards: IFRS 9 (2016/2898(RSP).

European Commission (2018), “Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions - Action Plan: Financing Sustainable Growth (COM/2018/097 final)”.

Basel Committee on Banking Supervision (2020), “Climate-related financial risks: a survey on current initiatives”; See, e.g. new Article 449a Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and amending Regulation (EU) No 648/2012 (CRR).

De Guindos, L. (2019), “Implications of the Transition to a Low-Carbon Economy for the Euro Area Financial System—Speech by Luis de Guindos, Vice-President of the ECB, at the European Savings and Retail Banking Group Conference, Creating Sustainable Financial Structures by Putting Citizens First”, available at https://​www.​ecb.​europa.​eu/​press/​key/​date/​2019/​html/​ecb.​sp191121_​1~af63c4de7d.​en.​html (accessed in September 2020).

European Commission (2018), “Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions - Action Plan: Financing Sustainable Growth (COM/2018/097 final)”.

The adoption of EU taxonomy Regulation is a key milestone in defining legally sustainable activities.

European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”.

European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”.

European Systemic Risk Board (2016), “Too late, too sudden: Transition to a low-carbon economy and systemic risk”, Report of the Advisory Scientific Committee No 6 / February 2016, available at https://​www.​bis.​org/​review/​r200804g.​htm (accessed in September 2020); De Nederlandse Bank N.V. (2017), “Waterproof - An exploration of climate-related risks for the Dutch financial sector”; Bank of England (2019), “The 2021 biennial exploratory scenario on the financial risks from climate change – Discussion Paper”, available at https://​www.​bankofengland.​co.​uk/​-/​media/​boe/​files/​paper/​2019/​the-2021-biennial-exploratory-scenario-on-the-financial-risks-from-climate-change.​pdf?​la=​en&​hash=​73D06B913C73472D​0DF21F18DB71C2F4​54148C80 (accessed in September 2020); Basel Committee on Banking Supervision (2020), “Climate-related financial risks: a survey on current initiatives”; Bank for International Settlements (2020), “The green swan Central banking and financial stability in the age of climate change”.

De Guindos, L. (2019), “Implications of the Transition to a Low-Carbon Economy for the Euro Area Financial System—Speech by Luis de Guindos, Vice-President of the ECB, at the European Savings and Retail Banking Group Conference, Creating Sustainable Financial Structures by Putting Citizens First”, available at https://​www.​ecb.​europa.​eu/​press/​key/​date/​2019/​html/​ecb.​sp191121_​1~af63c4de7d.​en.​html (accessed in September 2020); Giuzio, M., Krusec, D., Levels, A., Melo, A-S., Mikkonen, K., & Radulova, P. (2019), “Climate Change and Financial Stability”, ECB Financial Stability Review, May.

European Systemic Risk Board (2016), “Too late, too sudden: Transition to a low-carbon economy and systemic risk”, Report of the Advisory Scientific Committee No 6 / February 2016, available at https://​www.​bis.​org/​review/​r200804g.​htm (accessed in September 2020).

Network on Greening the Financial System (2018), “First progress report”; De Nederlandse Bank N.V. (DNB 2017), “Waterproof - An exploration of climate-related risks for the Dutch financial sector”.

Articles 97 and 100 of Directive EU/2013/36 of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (CRD).

European Commission (2000), “Communication from the Commission on the Precautionary Principle. COM(2000) 1 Final”.

Cullen, J. (2018), “After ‘HLEG’: EU Banks, Climate Change Abatement and the Precautionary Principle”. Cambridge Yearbook of European Legal Studies, 20, 61–87; I. Webb, D. Baumslag R. Read (2017), “How should regulators deal with uncertainty? Insights from the Precautionary Principle”, available at https://​bankunderground.​co.​uk/​2017/​01/​27/​how-should-regulators-deal-with-uncertainty-insights-from-the-precautionary-principle/​ (accessed in September 2020).

Majone, G. (2002), “What Price Safety? The Precautionary Principle and Its Policy Implications”. Journal of Common Market Studies, 40(1), 89–109; Sunstein, C. (2003), “Beyond the Precautionary Principle”. University of Pennsylvania Law Review, 151, 1003–1058.

Majone, G. (2002), “What Price Safety? The Precautionary Principle and Its Policy Implications”. Journal of Common Market Studies, 40(1), 89–109; Sunstein, C. (2003). “Beyond the Precautionary Principle”. University of Pennsylvania Law Review, 151, 1003–1058.

European Commission (2000), “Communication from the Commission on the Precautionary Principle. COM(2000) 1 Final.”.

European Central Bank (2020), “Eurosystem reply to the European Commission’s public consultations on the Renewed Sustainable Finance Strategy and the revision of the Non-Financial Reporting Directive”; Carney, M. (2015), “Breaking the Tragedy of the Horizon—Climate Change and Financial Stability”, available at https://​www.​bankofengland.​co.​uk/​-/​media/​boe/​files/​speech/​2015/​breaking-the-tragedy-of-the-horizon-climate-change-and-financial-stability.​pdf?​la=​en&​hash=​7C67E78565186245​7D99511147C7424F​F5EA0C1A (accessed in September 2020).

Riso, A.L., Zagouras, G. (2020), “Single Supervisory Mechanism (SSM)”, in Grieser S.G. and Heemann M. (eds.), Europäisches Bankaufsichtsrecht, 71–110; Zilioli, C., Riso, A.L. (2018), “New Tasks and Central Bank Independence: the Eurosystem Experience”, in Lastra R. M. and Conti-Brown P. (eds.), Research Handbook on Central Banking, 155–183; Haldane, A. (2013), “Why Institutions Matter (More Than Ever)”, available at https://​www.​bankofengland.​co.​uk/​speech/​2013/​why-institutions-matter-now-more-than-ever (accessed in September 2020); Zulianello, M., Ceccobelli, D. (2020), “Don’t Call It Climate Populism: On Greta Thunberg’s Technocratic Ecocentrism”. The Political Quarterly, 91(3), 623–631.

Elderson, F. (2020), “We Should Aim for a 1.5 Degree Economy When Designing the Recovery Path—Speech by Mr Frank Elderson, Executive Director of Supervision of the Netherlands Bank, at the OECD Committee on Financial Markets Webinar, 1 July 2020.”, available at https://​www.​bis.​org/​review/​r200804g.​htm (accessed in September 2020).

Elderson, F. (2019), “We All Play a Vital Role Keynote Speech by Mr Frank Elderson, Executive Director of Supervision of the Netherlands Bank, at the International Capital Markets Conference, Frankfurt am Main, 30 August 2019”, available at https://​www.​bis.​org/​review/​r190904c.​htm (accessed in September 2020).

European Systemic Risk Board (2016), “Too Late, Too Sudden: Transition to a Low-Carbon Economy and Systemic Risk”, Report of the Advisory Scientific Committee No 6 / February 2016, available at https://​www.​bis.​org/​review/​r200804g.​htm (accessed in September 2020).

Basel Committee on Banking Supervision (2020), “Climate-related financial risks: a survey on current initiatives”.

Bank for International Settlements (2020), “The green swan – Central banking and financial stability in the age of climate change”.

See also on this Tinbergen, J. (1952), “On the Theory of Economic Policy”, in particular Chapter IV.

Volz, U. (2017), “On the Role of Central Banks in Enhancing Green Finance”, available at http://​unepinquiry.​org/​wp-content/​uploads/​2017/​02/​On_​the_​Role_​of_​Central_​Banks_​in_​Enhancing_​Green_​Finance.​pdf (accessed in September 2020).

Basel Committee on Banking Supervision (2019), “Core Principles for Effective Banking Supervision”.

Basel Committee on Banking Supervision (2019), “Core Principles for Effective Banking Supervision”, BCP 01.1.

Basel Committee on Banking Supervision (2019), “Core Principles for Effective Banking Supervision”, BCP 01.65.

Basel Committee on Banking Supervision (2019), “Core Principles for Effective Banking Supervision”, BCP 01.79.

See Articles 4(3) and 9(1) Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (SSMR).

See Judgement of 13 December 2017, Crédit Mutuel Arkéa, T-52/16, ECLI:EU:T:2017:902, paragraph 175; Biermann, B. (2019). “Sustainable Capital: Prudential Supervision on Climate Risk for Banks”, in Beekhoven van den Boezem F.J., Jansen C. and Schuijling B. (eds.), Sustainability and Financial Markets, 129–162.

Riso, A.L., & Zagouras, G. (2020). “Single Supervisory Mechanism (SSM)”, in Grieser S.G. and Heemann M. (eds.), Europäisches Bankaufsichtsrecht, 71–110; Zilioli, C., Riso, A.L. (2018), “New Tasks and Central Bank Independence: the Eurosystem Experience”, in Lastra and R.M. and Conti-Brown P. (eds.), Research Handbook on Central Banking, 155–183.

It has been argued, however, that even the primary objective of price stability should be seen as functional to the efficient allocation of resources performed by an open market economy with free competition, and the latter would therefore trump even the primary objective of price stability. According to this reading, pursuing the primary (or another) objective should not imply a departure from the open economy model, even to achieve a social market economy (although the latter is expressly mentioned in Article 3(3) TEU).

Fischer, Y. (2019), “Global Warming: Does the ECB Mandate Legally Authorise a ‘Green Monetary Policy’?”, in Beekhoven van den Boezem F.J., Jansen C., and Schuijling B. (eds.), Sustainability and Financial Markets, 163–198. It has been argued that “In normal circumstances an open market economy with free competition favours an efficient allocation of resources. The ESCB should therefore not use monetary policy measures that violate that principle. Such were the circumstances under which the Treaty was written, and under which the euro area functioned during its first decade. However, there may be circumstances under which the assumption of a functioning open market economy with free competition breaks down […]. Arguably, under circumstances where markets fail, the premise of the principle of an open market economy with free competition – i.e. that it favours an efficient allocation of resources – no longer holds. Perhaps then, under such circumstances, monetary policy measures that would normally be at odds with the principle of an open market economy with free competition become acceptable”, Hopman, C. (2018). “Monetary Policy and the Principle of an Open Market Economy with Free Competition”, ECB Legal Conference 2018, 36–43, at 40.

For a different view see: Weidmann, J. (2020), “Combating Climate Change—What Central Banks Can and Cannot Do”, Speech at the European Banking Congress, available at https://​www.​bundesbank.​de/​en/​press/​speeches/​combating-climate-change-what-central-banks-can-and-cannot-do-851528 (accessed in January 2020); Mersch, Y. (2018). “Climate Change and Central Banking”—Speech by Mr. Yves Mersch, Member of the Executive Board of the European Central Bank, at the Workshop discussion “Sustainability is becoming mainstream”, Frankfurt am Main, 27 November 2018, available at https://​www.​bis.​org/​review/​r181128b.​htm (accessed in September 2020). Although the discussion mainly relates to the ECB tasks as a central bank, it may be worth observing that if the open market economy principle may trump the primary objective of price stability as the proponents of this reading of the principle argue, a fortiori it might be possible for the supporters of this line of thought to argue that this principle may also trump secondary objectives, including those pursued in the performance of other ECB tasks, such as its supervisory tasks. It is also worth highlighting that this reading of the open market economy principle also sees such principle as incompatible with the ‘social market economy’ referred to in Article 3(3) TEU, whose aims include “a high level of protection and improvement of the quality of the environment”: accordingly, the Eurosystem (but why not the SSM by extension if the latter is also bound by Article 127 TFEU?) would thus be subject to an overarching principle (the open market economy) different from and incompatible with the overarching principle applicable to the Union as a whole (the social market economy). See Kaiser, K. (2018), “The Objective of Price Stability and the Principle of an Open Market Economy: What Trumps?” ECB Legal Conference 2018, 26–30.

See Schnabel, I. (2020). “When Markets Fail—The Need for Collective Action in Tackling Climate Change”. See also Colesanti Senni, C., Monnin, P. (2020), “Central Bank Market Neutrality Is a Myth”, available at https://​www.​cepweb.​org/​central-bank-market-neutrality-is-a-myth/​ (accessed in January 2020); Riso, A.L. (2015), “An Analysis of the OMT Case from an EU Law Perspective”. In The ECB’s Outright Monetary Transactions in Courts, edited by Siekmann H., Vig V. and Wieland V., IMFS Interdisciplinary Studies in Monetary and Financial Stability, 1, 19–29.

The new provisions in the CRD and CRR have been introduced by Directive (EU) 2019/878 of 20 May 2019 and Regulation (EU) 2019/876 of the Council of 20 May 2019 respectively.

Article 98(8) CRD.

Article 501c CRR.

Articles 1(3) and 8(1a)(c) Regulation (EU) No 1093/2010 (the EBA Regulation), as amended by Regulation (EU) 2019/2175 of 18 December 2019.

Basel Committee on Banking Supervision (2019), “Core Principles for Effective Banking Supervision”, in particular BCBS SRP 10 and BCBS SRP 30 with regard to risk management.

Pursuant to Article 97(1) CRD, for the evaluation of the risks which an institution poses to the financial system account should be taken of the identification and measurement of systemic risk under Article 23 of Regulation (EU) No 1093/2010. The latter has been in turn amended by Regulation (EU) 2019/2175, to include environmental risk in the systemic risk whose potential to increase in a situation of stress should be evaluated.

See Article 98(1) CRD, in particular (b), (h), (i), (j).

See Article 107 CRD and European Banking Authority (2014), “Guidelines for common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing (EBA/GL/2014/13)”.

Internal Capital Adequacy Assessment Process, i.e. the process for the identification, measurement, management and monitoring of internal capital implemented by the institution pursuant to Article 73 CRD.

Internal Liquidity Adequacy Assessment Process, i.e. the process for the identification, measurement, management and monitoring of liquidity implemented by the institution pursuant to Article 86 CRD.

It needs to be reiterated that this should happen alongside integrating climate-related and environmental risks into the mandate of prudential supervisors.

Network for Greening the Financial System (2020), “Guide for Supervisors Integrating climate-related and environmental risks into prudential supervision”.

Network for Greening the Financial System (2020), “Guide for Supervisors Integrating climate-related and environmental risks into prudential supervision”; European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”; European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”.

European Banking Authority (2019), “Report on undue short-term pressure from the financial sector on corporations”.

Network for Greening the Financial System (2020), “Guide for Supervisors Integrating climate-related and environmental risks into prudential supervision”; European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”; European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”.

European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”.

See also European Banking Authority (2017), “Guidelines on internal governance (EBA/GL/2017/11)”, paragraph 30.

See European Banking Authority (2014), “Guidelines for common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing (EBA/GL/2014/13)”, paragraph 64–65; see also European Banking Authority (2018), “Guidelines on the revised common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing (EBA/GL/2018/03)”, paragraphs 59 and 60 under Principle 4.

For an analysis of the potential prudential impact of the tightening of energy efficiency standards for credit institutions, see also, e.g. Bank of England (2018), “Prudential Regulation Authority report”, Box 3, “Transition in thinking: the impact of climate change on the UK banking sector”.

Task Force on Climate-related Financial Disclosures (2017), “Technical supplement: The Use of Scenario Analysis in Disclosure of Climate-related Risks and Opportunities”; Network for Greening the Financial System (2020), “Requirements for scenario analysis”.

European Banking Authority (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”; see European Banking Authority (2017), “Guidelines on internal governance (EBA/GL/2017/11)”, article 23; see also European Banking Authority (2014), “Guidelines for common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing (EBA/GL/2014/13)”; see also European Banking Authority (2018), “Guidelines on the revised common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing (EBA/GL/2018/03)”, paragraphs 25, 32 and 34 under Principles 2 and 4.

European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”; Network for Greening the Financial System (2020) “Guide for Supervisors Integrating climate-related and environmental risks into prudential supervision”; see European Banking Authority (2017), “Guidelines on internal governance (EBA/GL/2017/11)”, paragraphs 136 and 139.

See European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectation 3.3 and 6. See also European Banking Authority (2017), “Guidelines on internal governance (EBA/GL/2017/11)”, paragraphs 24 and 28, on the oversight role and the achievement of its objectives.

See European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectations 4.1 and 4.2. For a general understanding of the RAF’s function, see also European Banking Authority (EBA 2016), “Guidelines on ICAAP and ILAAP information collected for SREP purposes (EBA/GL/2016/10)”; SSM supervisory statement on governance and risk appetite and Financial Stability Board (2013), “Principles for An Effective Risk Appetite Framework”.

See also European Banking Authority (2018), “Guidelines on the revised common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing (EBA/GL/2018/03)”, paragraph 100.

European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”. The ECB expects banks to develop quantitative metrics to monitor and report their exposures in the longer run, although qualitative metrics may be used as an interim step. See also European Banking Authority (2017), “Guidelines on internal governance (EBA/GL/2017/11)”, paragraph 138.

See Article 74 CRD and European Banking Authority (2017), “Guidelines on internal governance (EBA/GL/2017/11)”, in particular paragraphs 23, 30 and 131.

As noted by the NGFS, a possible development in the future is that appropriate knowledge, skills and expertise in relation to climate-related and environmental risks may be integrated in the fit and proper assessment of board members appointments, see Network for Greening the Financial System (2020), “Guide for Supervisors Integrating climate-related and environmental risks into prudential supervision”. According to the EBA, it should already be the case that Members of the specialized committees on ESG risks should have appropriate knowledge, skills and expertise concerning ESG risks and assist the management body in its supervisory function with regard to the extent to which institutions’ activities are exposed to ESG risks, see European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”.

See European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”, expectation 3.2, and European Banking Authority (2017), “Guidelines on internal governance (EBA/GL/2017/11)”, paragraphs 23, 28, 33, 95, as well as Principle 1 (i) and Principle 2 (iii) and (v), and European Banking Authority (2018), “Guidelines on the revised common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing (EBA/GL/2018/03)”, paragraphs 32 and 34.

Network for Greening the Financial System (2020), “Guide for Supervisors Integrating climate-related and environmental risks into prudential supervision”; European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”.

See European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectation 3.1; see also European Banking Authority (2017), “Guidelines on internal governance (EBA/GL/2017/11)”, paragraph 67.

See also OECD (2019), “Guidelines for Multinational Enterprises‘’ and OECD, 2019, “Due Diligence for Responsible Corporate Lending and Securities Underwriting – Key considerations for banks implementing the OECD Guidelines for Multinational Enterprises”.

See also European Banking Authority (2020), “Guidelines on loan origination and monitoring (EBA/GL/2020/06)”, in particular sections 4.3.5 and 4.3.6.

European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectation 5.2; see also European Banking Authority (2017), “Guidelines on internal governance (EBA/GL/2017/11)”, paragraphs 155 and 160. Compliance functions should additionally advice the management body on compliance with applicable law and regulation: see European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectation 5.4; and European Banking Authority (2017), “Guidelines on internal governance (EBA/GL/2017/11)”, paragraph 192.

European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectation 5.4; European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”, paragraph 139.

See European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectation 6; see also European Central Bank (2018), “Guide to the internal capital adequacy assessment process (ICAAP)”, paragraphs 29 and 30 under Principle 2; European Banking Authority (2017), “Guidelines on internal governance (EBA/GL/2017/11)”; and European Banking Authority (2018), “Guidelines on the revised common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing (EBA/GL/2018/03)”, Section 5.8.

Network on Greening the Financial System (2020), “Guide for Supervisors Integrating climate-related and environmental risks into prudential supervision”.

Network for Greening the Financial System (2020), “Guide for Supervisors Integrating climate-related and environmental risks into prudential supervision”; European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”; European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”.

See Article 73 CRD. See also European Banking Authority (2017), “Guidelines on internal governance (EBA/GL/2017/11)”, paragraphs 136 and 137. See also European Central Bank (2018), “Guide to the internal capital adequacy assessment process (ICAAP)”, paragraphs 32 and 34 under Principle 2 (ii).

The ECB highlights that risks should not be excluded because of the difficulty to quantify them or because data are not available. See European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectation 7.2.

European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectation 7.5, ECB; European Central Bank (2018), “Guide to the internal capital adequacy assessment process (ICAAP)”, paragraph 60.

European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectation 7.6; European Central Bank (2018), “Guide to the internal capital adequacy assessment process (ICAAP)”, paragraph 18 under Principle 1 (iii).

See Article 79 CRD.

European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectation 8.1; European Banking Authority (2020), “EBA Guidelines on loan origination and monitoring (EBA/GL/2020/06)”, paragraph 57; European Central Bank (2018), “Guide to the internal capital adequacy assessment process (ICAAP)”, principles 2 (ii) and (iii).

Although it is worth noting commonly used traditional credit risk indicators, such as probability of default (PD) and loss given default (LGD) are primarily based on historical data, which in most cases, do not reflect expected impact of environmental or social factors. The assessment of climate-related and environmental risks may thus have to build on different metrics, see European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”.

The ECB expects banks to consider granular elements such as e.g. the physical location of assets and the energy efficiency in the case of real estate, and to incorporate these considerations both in the evaluation of collateral, and in its periodic review; European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectation 8.3.

See European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectation 8.4.

See Article 76(3) CRD as well as European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectations 8.5 and 8.6; European Banking Authority (2020), “EBA Guidelines on loan origination and monitoring”, paragraphs 189, 187, 190, 200 and 201.

See Article 83 CRD and European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectation 10; see also European Central Bank (2018), “Guide to the internal capital adequacy assessment process (ICAAP)”, principles 2 and 7.

European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”.

European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”.

See Article 85 CRD and European Banking Authority (2018), “Guidelines on the revised common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing (EBA/GL/2018/03)”, paragraph 255.

European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectation 9.2; Banks that provide portfolio management or financial advice will also have to comply with the disclosure requirements laid down in Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector.

European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectation 9.1; European Banking Authority (2019), “Guidelines on outsourcing (EBA/GL/2019/02)”, paragraph 31 under Section 4.

European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”.

See Article 86(1) CRD.

See also Bundesanstalt für Finanzmarktaufsicht (2020), “Guidance Notice on Dealing with Sustainability Risks”, p. 18.

European Central Bank (2020) “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”. See also Bank for International Settlement (2020), “The green swan – Central banking and financial stability in the age of climate change”, p. 28.

Network on Greening the Financial System (2020), “Guide for Supervisors Integrating climate-related and environmental risks into prudential supervision”.

See European Banking Authority (2017), “Guidelines on internal governance (EBA/GL/2017/11)”, paragraphs 140 et seq.; and European Banking Authority (2016), “Guidelines on ICAAP and ILAAP information collected for SREP purposes (EBA/GL/2016/10)”, Chapters 5.4 and 6.5.

European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectation 11.

See European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectations 13.5 and 13.6.

Task Force on Climate-related Financial Disclosures (2017), “Recommendations of the Task Force on Climate-Related Financial Disclosure”.

European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectation 13.4. See also Network for Greening the Financial System (2020), “Guide for Supervisors Integrating climate-related and environmental risks into prudential supervision”.

See Article 449a CRR.

See Article 431(3) CRR.

See European Central Bank (2020), “Guide on climate-related and environmental risks. Supervisory expectations relating to risk management and disclosure”, expectation 13.2. See also European Banking Authority (2014), “Guidelines on materiality, proprietary, and confidentiality and on disclosure frequency on materiality, proprietary and confidentiality and on disclosure frequency under Articles 432(1), 432(2) and 433 of Regulation (EU) No 575/2013 (EBA/GL/2014/14)”, paragraph 19.

European Central Bank (2020), “ECB report on institutions’ climate-related and environmental risk disclosures”.

In other words, following the line of argumentation underlying the ECB supervisory expectations, i.e. that climate-related and environmental factors are drivers of prudential risks, the ECB has already—as any other supervisors—the possibility to use all powers which are granted to prudential supervisors to handle prudential risks. Against these background supervisory, expectations may thus be seen as an ex ante assessment built around standards, compliance with which should generally reassure banks (unless specific circumstances occur) that their risk profile does not raise concerns, and the use of supervisory powers should not be warranted.

See Core principles 8, 9 and 11.

Business model analysis, assessment of internal governance and internal controls, assessment of risks to capital and of risks to liquidity. See Articles 97 and 98 CRD, and European Banking Authority (2014), “Guidelines for common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing (EBA/GL/2014/13)”.

See Articles 104, 105 and 106 CRD. See also European Banking Authority (2015), “Guidelines on triggers for use of early intervention measures pursuant to Article 27(4) of Directive 2014/59/EU (EBA/GL/2015/03)” and European Banking Authority (2020), “Discussion paper - Application of early intervention measures in the European Union according to Articles 27-29 of the BRRD”.

Network for Greening the Financial System (2020), “Guide for Supervisors Integrating climate-related and environmental risks into prudential supervision”.

Article 98(8) CRD, as amended by Directive (EU) 2019/878.

European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”.

European Banking Authority (2020), “Discussion Paper—On Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”.