DNB consults the market on its Good Practices on the integration of climate-related risks into banks’ risk management

On 27 November 2019 DNB published its Good Practices: Integration of climate-related risk considerations into banks’ risk for consultation. DNB invites banks (i.e. credit institutions) to provide their views on these Good Practices before 17 January 2020. The most important question for these banks is whether these Good Practices are reasonable, effective and desirable and whether they actually offer tools for the further integration of climate-related risks into (i) the governance, (ii) the risk management and (iii) the disclosure of/by banks. Climate-related risks should be understood as both physical risks (such as damages suffered due to extreme weather conditions) and transitional risks (resulting from the process of adjustment towards a carbon-neutral economy). For more background on the impact of such climate-related risk in banking supervision, please refer to the Chapter that Bart Bierman wrote on this matter in Sustainability and financial markets (F.E.J. Beekhoven van den Boezem et al., Deventer: Wolters Kluwer 2019, p. 129-162). This Chapter discusses the question to what extent the banking supervisors can impose capital requirements for climate-related risks that the banks may be subject to.

The Good Practices are part of a broader range of initiatives from DNB to create more awareness on the potential financial impact that climate-related risks can have on the balance sheets of banks, and on integrating these risks in the risk management practices of these banks. The Good Practices are based on – among other things – the findings from DNB’s analysis of the Climate Risk self-assessments completed by less significant institutions (LSI’s). The Good Practices also relate to the work of the NGFS (Network of Central Banks and Supervisors for Greening the Financial System) and the ECB’s attention to climate-related risks in its risk priorities for 2020.