With the postponement of COP 26 and the current regulatory and banking sector focus on managing the fall-out from COVID-19, there has been much speculation about the resulting impact on the climate change regulatory agenda.

We highlight below key recent developments as they relate to the banking sector in the UK, internationally, and within the EU. In the case of the latter, we focus in particular on the European Commission’s (EC) recent consultation on its renewed Sustainable Finance Strategy.

We conclude that whilst regulators will continue to focus on managing the immediate fallout from COVID-19, climate risks will continue to remain on the banking regulatory/policy agenda. Moreover, COVID-19 has highlighted how non-financial risks such as climate change are capable of generating financial risks that can significantly affect both the global economy and firms. It therefore seems likely that this will ultimately serve as a catalyst for regulatory action on climate risk. It might in future also drive changes to the way in which climate risks are regulated, with aspects of the approach to the latter forming part of a wider regulatory response to COVID-19. [1]

Climate risk – recent developments

In the UK, the Prudential Regulation Authority (PRA) recently published its Business Plan for 2020/2021.  Notwithstanding its current focus on COVID-19 and the decision to delay publication of guidance from the Climate Financial Risk Forum on integrating climate‑related risks into business decision making, the PRA reiterated that climate risk continues to be of ‘particular interest’ to it ‘over the coming year’. It confirmed that it is continuing to prepare for the next climate Biennial Exploratory Scenario and that it will be issuing its response to its discussion paper on this and outlining the way forward in due course.

Internationally, the Network for Greening the Financial System (NGFS), with its 65 members, whose observers include the Basel Committee on Banking Supervision (BCBS) and the Bank for International Settlements, also issued its Annual Report. The Chair of the NGFS, who also co-chairs the Basel Committee’s recently established Task Force on Climate-related Financial Risks noted that ‘even in this [COVID-19] crisis, we should not lose sight of the fact that climate change stays an urgent and vital issue’. The report goes on to reaffirm the intention of the NGFS to release ‘in the short term’ a number of documents on scenario analysis, supervision practices and a status report on financial institutions [sic] practices regarding climate-related financial risks’.

Meanwhile, the BCBS High-level Task Force on Climate-related Financial Risks also issued its first report on climate risks. It took the opportunity to note that ‘Covid-19 has further highlighted the importance of mitigating the risks of events with severe global impacts’. And finally, the International Organization of Securities Commissions (IOSCO) published its report on sustainable finance and the role of securities regulators having also recently decided to establish its Board-level Task Force on Sustainable Finance.    

And in the EU, in the context of the EC’s integration of a green transition into its recovery strategy, the EC opted to launch its Renewed Sustainable Finance Strategy consultation.  This was followed by the statement from the EU Technical Expert Group on the tools for sustainable recovery from the COVID-19 Pandemic.

EU’s Renewed Sustainable Finance Strategy 

Below, we highlight some key proposals within the EU’s Renewed Sustainable Finance Strategy, as they relate to banks. We cover the following four areas:

  • Climate risk Management;
  • Governance;
  • Disclosures; and
  • Definitions, standards and labels.

Climate risk management

The EC canvasses views on incorporating environmental, social and governance (ESG) considerations into the prudential framework for banks in a ‘faster’ and ‘more effective way’ than had been planned  and notes the need for more explicit ESG risk management provisions. In this respect, the paper considers introducing a new requirement to carry out assessments of potential long-term environmental and climate risks when providing financing.

The EC also discusses its last Capital Requirements Regulation (CRR)/Capital Requirements Directive (CRD) review. It says this envisaged a ‘gradual approach’ to ESG risks, which may no longer be suitable. In doing so, the EC raises the possibility of asking the European Banking Authority (EBA) to expedite its scheduled work on the CRR/CRD action points listed below:

  • Assessing and possibly integrating climate risks into the Supervisory Review and Evaluation process – the EBA is currently due to issue a report on this topic for banks in Q2, 2021 which may be followed by guidelines.
  • Disclosure and governance of ESG risks – the EBA is currently expecting to issue its final draft ITS on disclosure of ESG risks under CRR 2/CRD 5 by Q2, 2021. Requirements are set to apply from June 2022.
  • Exploring ‘dedicated’ prudential treatment of exposures related to sustainable assets/activities - the EBA is scheduled to issue a report on this under CRR 2/CRD 5 by June 2025.

The EC additionally asks about the need for a new dedicated green securitisation regulatory and prudential framework. It is likely that the topic of dedicated prudential treatment of assets/activities will resurface in the context of the EC’s forthcoming CRR 3/CRD 6 package - while the EC’s timeline for tabling this proposal may slip by a few months, we still expect this to come in 2020.

Finally, the EC discusses establishing a Brown Taxonomy, in addition to the current Green Taxonomy. This could help both firms and supervisors to identify and manage climate risks better and form a basis on which regulators can build prudential tools.


The EC highlights its forthcoming study on directors’ duties and sustainability targets (Q2, 2020) and asks more generally whether expanded interests like climate change should be considered by companies and their directors in corporate decisions, beyond existing requirements.

It goes on to note that the Shareholder Rights Directive II states that directors’ variable remuneration should be based on both financial and non-financial performance, where applicable, but that it does not currently include requirements regarding what the fraction of variable remuneration should be linked to, when it comes to ‘non-financial performance’. The Consultation Paper therefore asks:

  • Firstly, whether there should be a mandatory share of variable remuneration linked to non-financial performance.
  • And secondly, whether a defined set of EU companies (not identified within the paper) should be required to include carbon emission reductions in their lists of non-financial factors affecting directors’ variable remuneration.


The paper discusses new requirements for banks to:

  • Estimate and disclose which temperature scenario their portfolios are financing (e.g.2°C, 3°C, 4°C), in comparison with goals of the Paris Agreement and on the basis of a common methodology.
  • Set out and explain how their business strategies and targets contribute to the goals of the Paris Agreement.

It also discusses establishing a common, environmental data space for companies’ ESG information, including data reported by banks under the Non-Financial Reporting Directive.   

Definitions, standards and labels

Finally, in the light of the Taxonomy and the Financial Service Ecolabel, the EC highlights the need for clarity on sustainable product definitions. It discusses:

  • Developing new standards for:
  • Sustainability linked bonds/loans
  • Green loans
  • Energy efficient mortgages.
  • Modifying existing prospectus disclosure requirements.
  • Approaches to supervising verifiers of ‘EU Green Bonds’.


COVID-19 provides a test case for the way in which extreme but plausible scenarios associated with non-financial risks such as climate change can generate financial risks that significantly affect both the global economy and financial services firms.  And whilst we expect the focus of regulators to remain on managing the immediate fallout from COVID-19, the experience with this pandemic, together with the above regulatory/policy developments and the move towards integrating green transition into recovery, all suggest that climate change risks will continue to remain an important issue in the EU, UK and internationally. Indeed if anything, in the medium to long-term, COVID-19 is likely both to reinforce and accelerate this trend. It may also ultimately drive changes to the way in which climate risks are regulated in the future, with the regulatory response instead emerging alongside and as part of a broader response to COVID-19.<! [2]


[1] Panel session discussion moderated by Sonja Gibbs of the Institute of International Finance (IIF) entitled ‘Reassessing the Sustainable Finance Policy Agenda’ with Chris Faint, Head of Division, Bank of England, Rostin Behnam, Commissioner, Commodity Futures Trading Commission and Martin Spolc, Head of Sustainable Finance, Directorate-General for Financial Services, European Commission, in ‘Driving the Sustainable Finance Agenda: How COVID-19 Could Catalyze Progress, IIF, Washington,  17 April 2020.

 [2] See footnote 1.