A circular published by the Luxembourg Financial Sector Supervisory Commission (CSSF) in June 2021 describes how Luxembourg’s financial regulator expects credit institutions to take climate-related and environmental risks into account.
Physical risk drivers include heat waves and wildfires, rising sea levels, deforestation or diversity loss, while some examples of transition risk drivers are environmental taxation and subsidies or regulatory requirements, .
A self-assessment exercise among less-significant institutions (LSIs), or small and medium-sized banks, was carried out in 2022 to assess their compliance with the circular and improve knowledge around climate and environmental risk assessments. Twelve LSIs and three branches of non-EU credit institutions were included in the sample.
The main outcomes of this self-assessment exercise were presented at a organised by the CSSF and the Luxembourg Banker’s Association (ABBL) on 20 June 2023. Here are a few takeaways from the exercise.
35% of banks have achieved “concrete progress”
Of the institutions included in the exercise, "only 35% of the banks have achieved concrete progress regarding CR&E [climate-related and environmental] risk identification and materiality assessment,” said the CSSF in its presentation slides.
35% said they were “mostly aligned” with the CSSF’s expectations in terms of risk identification and materiality assessment; 42% of respondents said they were “partially aligned” while 23% said they were “not aligned.”
0% said they were “fully aligned” with risk identification and materiality assessment expectations.
Only 8% said they were “mostly aligned” with CSSF expectations regarding climate and environmental risk drivers in their business strategy and risk appetite, while 51% said they were “partially aligned.”
Risk management frameworks and, in particular, stress testing practices should take climate-related and environmental risk drivers into account. 71% of banks said their risk management framework was partially (38%) or not aligned (33%) with the CSSF’s expectations.
The CSSF did note that institutions have made progress with internal governance with training sessions and assigning responsibility for managing climate and environmental risks. 27% of institutions said that they are fully or mostly aligned with CSSF expectations for internal governance, and 54% said they are partially aligned.
11% have “adequate” action plans
In terms of risk management frameworks, 11% of banks in the self-assessment exercise said that they have “adequate” action plans in place. 23% said their action plans were “somewhat adequate,” 13% said their action plans were “somewhat inadequate” and 35% said their action plans were “inadequate.”
With regards to risk identification and materiality assessment, 58% of credit institutions said their action plans were “somewhat inadequate” and 27% said their plans were “inadequate.” That’s a total of 85%. Only 8% said their action plans were “adequate” and 8% said their action plans were “somewhat adequate.”
“As of 30 September 2022, most banks did not have a formal action plan in place with monitoring of deadlines, clear responsibilities and resources implications,” said the CSSF in its presentation slides. All banks (except two) were expected to implement a comprehensive action plan to ensure compliance with CSSF expectations by the end of 2024, noted the presentation.
Find the full CSSF presentation and webinar recording .