Banca d'Italia monitors and assesses the implications of climate-related risk for the resilience of directly supervised banks and intermediaries.
This page takes a look at:
Regulations
At international level, Banca d'Italia actively contributes to the work carried out in the main supervisory cooperation forums. The Basel Committee on Banking Supervision has published FAQs to clarify how climate-related financial risks are to be treated under the current Pillar 1 rules. The Committee is also considering possible improvements to the Pillar 2 and 3 rules; measures already taken include the publication in June 2022 of Guidelines for banks and supervisory authorities on the effective management and supervision of climate-related financial risks.
In Europe, the EBA published public disclosure standards (Pillar 3) for ESG risks, a report containing recommendations on their integration into the regulatory and supervisory framework of credit institutions and investment firms, and a report with short- and medium/long-term recommendations on how to integrate environmental and social risks into Pillar I. The European Commission also amended the delegated acts for MiFID II, UCITS and AIFMD to integrate sustainability factors and risks into the governance and risk management systems of investment service providers and fund managers.
Furthermore, recent developments on sustainability reporting under Article 8 of the Taxonomy Regulation, the Corporate Sustainability Reporting Directive (CSRD), the Sustainable Finance Disclosure Regulation (SFDR) and, with specific reference to the accounting impacts of climate risks, the educational material published by the IFRS Foundation, should all be taken into account.
Supervisory actions
The integration of sustainability (ESG) factors into business and supervisory processes is among the strategic priorities for the coming years: the aim is to raise awareness among intermediaries, both banking and non-banking, of the challenges and opportunities that ESG factors may bring to their respective business models and to develop appropriate supervisory assessment paths.
As part of the Single Supervisory Mechanism, Banca d'Italia helps assess significant banks' plans for adapting to the ECB's supervisory expectations on climate-related and environmental risks and contributes to conducting climate-related stress-testing exercises. The results of the latest test were published in July 2022.
At the national level, in-depth studies were carried out to assess the degree of compliance of institutions supervised directly by Banca d'Italia and dialogue with intermediaries were strengthened through dedicated meetings and workshops
In particular:
- in 2021, an initial round of interviews was conducted with members of the boards of directors of a large sample of less significant banks (LSIs) to gather information on their degree of awareness of climate-related and environmental risks and an in-depth assessment was performed on the ways in which asset management companies (SGRs) integrate ESG factors into business processes
- an initial set of supervisory expectations was published in April 2022, containing non-binding guidance on the integration of climate-related and environmental risks into the business strategies, governance and control systems, risk management framework and disclosures of supervised banks and financial intermediaries
- two thematic surveys were conducted to assess the degree of alignment of a representative sample of LSIs and non-bank intermediaries (INBs) with the 'expectations' The evidence on LSIs was summarized in a report, published in November 2022, which includes an initial set of 'good practices' observed. The results of the INB survey were briefly described in the Communication of 27 December 2022, published on 10 January 2023.
The boards of directors of all LSIs and INBs were therefore made aware of the need to define and approve action plans that would allow for the full integration of climate and environmental factors into the regular governance and risk management framework by 2025.
The main findings of the plan analysis were preliminarily shared with the banking and financial sector and trade associations at two roundtables, held on 7 and 8 September 2023 for LSIs and INBs respectively; the events also offered an opportunity to review the status of the plans and to discuss critical issues and challenges facing the market.
Furthermore, in December 2023, the main findings of the analysis of the action plans prepared by the LSIs and the action plans prepared by the INBs were published, together with an update of the good practices observed, as well as the initial findings from the analysis of the accounting impacts and the ESG risk disclosures of Italian banks.
Banca d'Italia's banking supervision staff will continue to consider sustainability issues in their regular supervisory dialogue with LSIs and INBs, in part to monitor their progress in implementing the action plans, in keeping with the principle of proportionality.
Analysis on financial stability
The expected effects of climate change and the decarbonization process, especially if it is disorderly, could translate into costs for the economic system and losses for the financial system. Moreover, the financial system's role as intermediary for savings and investments by businesses and households places it in the position of possibly amplifying the negative consequences of adverse events associated with climate change and with the energy transition needed for decarbonization.
Assessing the financial system's exposure to climate risks is a complex task. The analyses carried out in this area mainly involve assessments of the exposures of households, firms, and financial intermediaries to physical and transition risks and the possible consequences for the financial vulnerability of those sectors of the materialization of those risks. The Bank participates extensively in international working groups set up to address these issues within the institutions involved in matters of financial stability, including the Financial Stability Board (FSB), the European Systemic Risk Board (ESRB) and the European Central Bank.
As with other climate or energy-related research papers, those on financial stability issues are disseminated through Banca d'Italia's scholarly series ('Working Papers', 'Occasional Papers', and 'Notes on Financial Stability and Supervision'), essays and articles published in peer-reviewed journals, and discussed at conferences and seminars organized by the Bank and other institutions.
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