EBRD President Odile Renaud-Basso
Emerging climate-related risk supervision and implications for financial institutions
Good morning, ladies and gentlemen.
Thank you for inviting me to speak to you today.
It is a pleasure to be here with you to talk about the role financial regulators can play in addressing and managing climate risks and what this means for financial institutions.
First, however, I want to stress that the EBRD is no stranger to the financing of a green, low-carbon and climate-resilient transition.
We’ve been celebrating our 30th birthday this year and so history has been much on our minds.
In fact, the Articles establishing the Bank 30 years ago obliged us to ‘to promote….environmentally sound and sustainable development’.
Back then, that might have seemed rather unconventional.
But time has shown how visionary that original pledge was.
In 2006, we formalized and boosted our green finance activities by establishing our first Sustainable Energy Initiative.
Since then we have committed €38 bn towards green projects.
We continue to do more, faster.
But simply scaling up our green financing will not be enough to address and overcome the challenge climate change presents the financial sector.
We, as financial institutions, need to make our own institutions climate-resilient and do far more to support the low carbon and climate-resilient transition.
We need to green both ourselves and our funding decisions.
Firstly, we need to start disclosing information about the climate-related risks that matter for our portfolios, their exposure to climate risks, and our plans to reduce it.
This year we started screening and scoring our projects to assess their climate risk vulnerabilities.
We are asking our clients to consider and detail their plans to address climate risk.
With transparency comes accountability.
With accountability comes focus.
With focus, action.
Secondly, we need to manage climate risk for what it is: a financial risk.
A few examples
If you are financing agribusiness projects in regions where water is scarce and you don’t know how your client is managing their use of that resource, you risk losing money.
If your industrial client is making a profit but does not factor in the potential carbon price, your investment is also at risk.
If your real estate investment ignores increasing exposure to flood risk, the property may become increasingly difficult to rent as the costs associated with flood damage become more apparent.
And, lastly, as those examples demonstrate, we will need to green our relationships with our clients
It will not be good enough just to be green and virtuous ourselves.
We will need to ensure that our clients and partners take climate change impact very seriously.
Climate change is not only a risk to individual financed projects.
It is a risk to the stability of the financial sector as a whole.
As such, it requires systemic change.
And this change will not be easy for the EBRD regions.
Financial institutions in those regions operate in some of the world’s most carbon-intensive economies,
The shift towards decarbonisation will require deep, structural change.
This will have significant implications for the real economy and the financial system.
At the same time, we also operate in some of the world’s most climate-vulnerable countries.
There increasing water stress is one of several very serious risks to sectors such as agriculture as well as industry.
To be able to manage climate-related risks, we need a much clearer understanding of the climate-related challenges.
When we have that, it will be much easier to recognise further investment opportunities.
But this is no easy task.
In the run up to COP26 and in the light of our Paris Alignment commitment, the EBRD carried out a climate pulse survey of financial institutions across our regions.
We wanted to understand where our partners are in incorporating climate risk strategies and what obstacles they face in the evolving regulatory environment.
The feedback we received from more than 130 financial institutions was loud and clear.
The role of regulators in accelerating the shift to better climate risk management and transparency is and will continue to be absolutely critical.
This might include, for example, issuing specific supervisory guidance.
Or joining international initiatives such as the Network for Greening Financial Systems, which already sends a strong signal to the market.
The majority of the survey’s respondents also believe the impact of climate change to be relevant to their operations.
But they lack tools, guidance and understanding as to how to reflect climate change as a source of potential risks and how to manage them effectively.
Those who took the survey also flagged the need for more capacity building and knowledge sharing.
In fact, today’s event is an important part of such outreach.
It aims to provide insights into the regulatory experience and to discuss what the journey towards managing climate risk might look like for financial institutions.
We can all learn a lot from those who have already started down that road.
Last year, for example, we at the EBRD published our first standalone climate risk disclosures report.
It highlighted our own exposure to these risks and detailed our approach to governance in this area.
This is the beginning of a process and this year we will provide more granular information on our most exposed corporate sectors.
We want to share this knowledge with our banking partners and work with them to coordinate action across the financial sector to improve risk management.
Ladies and gentlemen, over the last year the world has understandably been focussed on dealing with the pandemic and its economic impact.
But our biggest challenge remains heading off the much worse climate crisis that threatens us all unless we radically restructure the way we live and work.
In particular, climate change poses a significant risk to our economies’ financial stability.
The faster we act now, the less disruption we will face in the future.
The post-pandemic recovery must, among other imperatives, drive the low-carbon transition and build resilience to the physical risks from climate change.
Multilateral development banks, such as the EBRD, can only do this together with private sector financial institutions - and regulators.