From Q1 2022 to Q1 2023 Bundesbank conducted a structured survey among all national supervised institutions as part of the annual supervisory discussions with management body. The aim of this survey was to gain an idea of the state of play with respect to banks’ implementation of the non-binding guidance contained in the BaFin Guidance Notice on Dealing with Sustainability Risks[1] in the areas of strategy, governance, business organisation and risk management of environmental, social and governance (ESG) risks. At the same time, it made institutions aware of supervisory expectations contained in the seventh amendment to the Minimum Requirements for Risk Management (MaRisk).[2] 

A total of 810 institutions participated in the structured survey up until its conclusion in March 2023, including 443 cooperative banks, 229 savings banks, 86 commercial banks, 11 promotional banks and 10 building and loan associations. Based on their own perspective, the majority of institutions consider themselves to be still in the planning phase or the early stages of the implementation phase with regard to integrating ESG risks into their business practices. The expected impact of ESG risks on the overall risk profile or the overall risk situation is currently seen as limited across all institutions under national supervision. All in all, 215 institutions, or 27%, reported that ESG factors are contributing to the materiality of one or more types of risk, primarily in the area of credit risk, but also market risk and reputational risk. By contrast, in an ECB survey among institutions subject to its direct supervision, four out of five institutions reported that they are materially exposed to climate-related risks. Considerable gaps were identified in the materiality assessment of the remaining fifth.[3] 

A total of 70% of institutions have incorporated ESG risks into their business and/or risk strategy. So far, ESG risks have been integrated into the business strategy primarily by means of sustainability goals. To date, there has been little evidence of sweeping measures, such as discontinuing certain business areas, being implemented in practice. The dominant approaches for the risk strategy have been setting a risk appetite, ESG-specific limits and sector-specific exclusions. On the whole, risk strategy measures are implemented even less frequently, on average, than business strategy measures.

With regard to conducting ESG-related internal stress tests and scenario analyses, 26% of respondents stated that they had conducted these or planned to do so in the current year. According to the survey data, larger institutions, in particular, appear to be at the forefront. Many institutions expressed a wish for specific recommendations from their associations in this regard. The extent to which the results feed back into strategic considerations and risk management has so far been limited.

The use of ESG ratings is not yet widespread overall. However, more than 40% of the surveyed institutions indicated that they are planning to use them.

All things considered, it is clear that significant efforts are still needed to ensure that ESG risks are dealt with adequately and that the future supervisory requirements of the seventh MaRisk amendment are fully satisfied. First and foremost, it must be ensured that there are fundamental methods and processes in place to determine the materiality of ESG risks and to integrate them holistically into institutions’ risk management on the basis of specific strategic guidelines. These issues, together with the parallel establishment and expansion of a quantitative database by institutions, will be the focus of supervision over the next few years. The intention is for ESG risks to be addressed regularly in supervisory meetings and for relevant priorities to be set in on-site inspections. A further aim is for dialogue with the institutional associations to be intensified. Implementation by institutions is generally considered with due regard to the principles of proportionality, materiality and methodological freedom.
 

Footnotes:

1. See BaFin, Guidance Notice on Dealing with Sustainability Risks, BaFin - Guidance Notices - Guidance Notice on Dealing with Sustainability Risks   
2. See BaFin, Mindestanforderungen an das Risikomanagement, https://www.bafin.de/dok/18645422 
3. See ECB, Walking the talk – Banks gearing up to manage risks from climate change and environmental degradation, p. 22, https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.thematicreviewcerreport112022~2eb322a79c.en.pdf