Roundtables with Italian banks and other financial intermediaries - Supervisory expectations for climate-related and environmental risks

On 7 and 8 September 2023, two roundtables took place at the Bank of Italy, respectively with banks and other supervised financial intermediaries, focusing on climate and environmental risks. The current and pervasive nature of these risks calls for a high level of attention and an open dialogue between supervisory authorities and supervised entities in order to foster the exchange of experiences and the establishment of good practices.

The roundtables provided an opportunity to continue the technical dialogue started last year and fall within a broader set of supervisory initiatives at both the national and European level. In 2020 the European Central Bank (ECB) published specific guidelines on the integration of climate and environmental risk into strategy and business models, governance processes, and risk management for significant banks in the SSM, as well as leading a number of supervisory activities on the topic. The Bank of Italy took similar action last year, focusing on the less significant Italian banks and non-bank financial intermediaries under its supervision.

In his opening remarks Paolo Angelini, Deputy Governor of the Bank of Italy, noted that recent supervisory action has been fast-paced, in line with the strategic priorities published in January 2023. He emphasized the leveraging of synergies between the measures taken to ensure financial intermediaries’ alignment with the supervisory expectations, as well as the Bank’s contribution to international and national initiatives on sustainable finance and climate risk measurement. He reiterated that ongoing regulatory developments in Europe, particularly the proposed Corporate Sustainability Due Diligence Directive (CSDDD), might have a significant impact not only on financial intermediaries but also on the broader business environment in Europe and Italy (see speech of 15 novembre 2022). In particular, the CSDDD will introduce several obligations for large companies with respect to sustainability and human rights, requiring them to take responsibility for their value chain, thereby exerting pressure also on small and medium-sized enterprises (SMEs). Thus, Deputy Governor Angelini urged financial intermediaries to prepare for these new rules, emphasizing the need to cooperate with non-financial companies on transition plans and to monitor the legal risks associated with sustainability regulations.

During the meetings, several issues were discussed, such as the progress of projects set up by intermediaries for the management of climate and environmental risks, the challenges posed by evolving ESG legislation and an assessment of the implications of climate and environmental risks, including from an accounting perspective. In general, the discussion showed that there is widespread awareness within the Italian financial system of the strategic importance of these types of risks. Good, albeit gradual and varied, progress was made compared with last year on the initiatives outlined in the action plans. There was also a substantial convergence of views on the main challenges and issues that will need to be addressed in the coming years, particularly in terms of strengthening the dialogue and fostering synergies with non-financial companies.

One of the key topics emphasized during the discussion was the availability and quality of ESG data. Almost all intermediaries reported relying on data purchased from professional providers. Many stressed that they do not rely on composite ESG scores for individual companies, preferring to use raw data for their analyses instead. Several intermediaries are developing proprietary algorithms for sustainability risk assessment and methods to incorporate them into credit and portfolio selection processes. Many intermediaries integrate the data purchased from external providers through questionnaires sent to companies; some participants have emphasized the importance of promoting the standardization of these questionnaires, advocating for consortium initiatives on the matter. It was noted that such standardization of sustainability reporting by unlisted SMEs is one of the objectives of the Sustainable Finance Roundtable featuring representatives of ministries and supervisory authorities, established last year on the initiative of the Ministry of Economy and Finance (MEF).

Another important issue raised in the debate concerned the current architecture of the European climate taxonomy, which could discourage investments in those economic activities for which there are currently no technical screening criteria in place to determine their contribution to climate change. On this aspect, the proposal to amend the European climate taxonomy published by the Platform on Sustainable Finance in March 2022, which aims to include more economic activities than under the current rules, might play an important role.

In his closing remarks Giuseppe Siani, Head of the Bank of Italy’s Directorate General for Financial Supervision and Regulation, noted that supervisory action aims to facilitate the financial system's alignment with the expectations set in 2022 by the Bank of Italy. He reiterated the need to maintain a dialogue with the industry on the challenges identified and the gradual emergence of good business practices, following a multi-year path. Mr Siani also confirmed that the Bank of Italy will continue to pursue a pragmatic approach, applying the principle of proportionality and recognizing the role that the financial system can play in facilitating the ecological transition. It will also continue to include sustainability issues in its routine supervisory dialogue, monitoring the progress that will be made in the implementation of various projects.