Banks' management of climate risk is also at the top of the supervisory agenda, Mr Herodotou said
Banks must take immediate measures to address climate change, said the Governor of the Central Bank of Cyprus, Constantinos Herodotou, during a conference on climate change held on Monday in Nicosia, highlighting the challenges faced by banks, the changes in the regulatory framework and the supervisory actions undertaken to date by the European Central Bank and the Central Bank of Cyprus.
According to a statement from the Central Bank, in his speech, Mr. Herodotou mentioned that climate risk is a significant challenge for the banking sector, both due to natural risks and transition risks, and in this context, banks should step up their efforts to integrate climate risk into their risk management practices and policies, analyze and segment their portfolios, understand their clients' transition strategies, and collect climate-related information for collateral.
He added that the management of climate risk by banks is also at the top of the supervisory agenda, as it is one of the three supervisory priorities of the SSM Single Supervisory Mechanism for the years 2023 to 2025, while at the same time, the European Supervisory Authorities' roadmaps integrate horizontally climate and environmental risks in all banking and investment products and activities as part of their 2023 work programme, by updating and strengthening all relevant parts of the supervisory and regulatory framework.
Referring to the regulatory framework, Mr. Herodotou said that the main direction of the EU is the regulation of the green transition of banks and the strengthening of transparency through uniform disclosure requirements, with the aim of acting as a constructive pillar towards the achievement of European green policies, which aim to achieve climate neutrality by 2050.
Green financial markets are growing rapidly due to the increased volume of euro area green funds and bonds, he continued, with assets under management in the Environment, Society and Governance (ESG) sectors having almost doubled from around 0 .8 trillion euros in 2019 to 1.6 trillion euros in 2021, and noted that, given the risks to financial stability arising from climate change, it is important to promote products that help shape a greener economy.
< p>The Governor of the CBC added that another important milestone is the revision of the Mortgage Lending Directive, according to which the Commission is investigating ways to support the adoption of energy-efficient mortgages, the so-called “green mortgages”, which are an important development for a inclusive and sustainable financial framework, noting that the ECB has set deadlines for banks to gradually meet all supervisory expectations by the end of 2024.
Regarding the actions undertaken by the Central Bank of Cyprus in this area, Ms. Herodotou mentioned that in 2021 a horizontal review was carried out where institutions were asked to carry out a self-assessment of their practices regarding climate and environmental risks in relation to with the expectations set out in the Guide issued by the ECB.
He added that the exercise revealed that significant efforts were needed, as only minimal actions had been taken so far, and that the CBC subsequently asked the less important institutions to develop implementation plans to promote climate and environmental risk management .
In addition, the key findings of the evaluation were communicated to the banks with a request to address the key deficiencies and either resubmit their implementation plans or submit a progress report with a more detailed timeline to primarily assess their functionality as well as capacity them to harmonize with the ECB's deadlines on the matter.
“The CBC, in line with the supervisory priorities of the SSM and the European Banking Authority, is committed to taking further actions to ensure that the Cypriot banking system complies with the ECB's guidelines and deadlines in relation to the transition to a low-emission economy carbon,” Mr. Herodotou emphasized, adding that for the less significant institutions, the aim is to apply these guidelines and deadlines in a manner that is commensurate with the nature, scale and complexity of their activities.
He also said that the fact that some Cypriot banks have started to take tangible steps towards their climate change transition is a positive development, however, as Cypriot banks are still at the beginning of the learning curve and behind their European counterparts, urged them to act faster and more decisively to meet the expectations of supervisors to integrate climate-related risks into the overall risk management framework.
According to Mr. Herodotou, the CBC is leading the effort for financial literacy in the country, adding that the ability of individuals to understand and manage their finances wisely and effectively extends to sustainability issues. “With market trends focusing on green bonds and green loans, and the risk of greenwashing, it is imperative for individuals to develop skills and knowledge of product regulations, rules and standards and services with sustainable features, so that they can make prudent and informed decisions about financial matters,” he added.
He also said that the CBC is leading and coordinating the work of the ad-hoc Committee that formulated a National Strategy for the Promotion of Financial Literacy and Financial Education in Cyprus and now intends to use its leadership role in the ad-hoc Committee to ensure that individuals understand sustainable financial products and their use to advance sustainable development goals.
In addition, he mentioned that the CBC is a big supporter in Cyprus of the Global Money Week awareness campaign, which is coordinated annually by the OECD and aims to promote information campaigns, including sustainable financial products, playing a key role in the integration of ESG factors into the financial decisions of people.
“The challenges I mentioned require immediate action and significant upfront investment before the benefits can be reaped. Complacency is not a viable option. We are confident that the Cypriot banking sector will meet all relevant regulatory and supervisory expectations and will remain resilient in the face of climate and environmental risks”, concluded the CBC Governor.
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