Climate and environmental indicators in the banks' strategies

The global trend towards a more sustainable economy is also changing the market environment for the financial sector: climate and environmental risks (C&E risks) are increasingly becoming part of the corporate strategy and risk management framework of banks. Key risk indicators (KRIs) and key performance indicators (KPIs) are needed to successfully manage H&I risks.

With these KPIs and KRIs, banks can take concrete measures to implement the regulatory objectives and requirements in relation to P&L risks.

Banks can influence the markets by restricting financing or changing the pricing of financial instruments. The importance of strategies relating to P&L risks and relevant key risk indicators (KRIs) and key performance indicators (KPIs) is also increasing for banks. Within the EU, the introduction of P&L risks, KRIs and KPIs is primarily driven by the ECB's guidance on climate-related and environmental risks.

Notes: The figure outlines how the transition to a sustainable economy is driving the transformation of banks. In particular, banks need to change their business and risk strategies by setting H&I-specific KPIs and KRIs and reflecting these through H&I-informed business decisions (including lending).

There are various challenges that banks have to face when operationalising their P&L obligations - one of the key challenges is obtaining data on climate and environmental risks. On the one hand, banks already have some C&I data available. Disclosure requirements aimed at banks, e.g. the EBA's Pillar 3 ESG requirements, help banks to integrate their P&L data. On the other hand, a bank may not have client-level P&L data available if the client does not disclose this information. In such cases, banks may consider using proxy data until disclosure requirements, such as company-level CSR disclosure (CSRD), improve access to detailed client-level data.

KPMG's project experience and the ECB's observations of best practice show that banks with advanced approaches implement different K&E KRIs and KPIs. For example, a KRI may represent the threshold for the degree of deviation from the climate-related transformation pathway, while a KPI may reflect the extent of financed emission reduction targets at portfolio level.

By integrating H&I risks, KPIs and KRIs into corporate strategy and Risk management, banks can better steer towards their H&I goals and strengthen their decision-making process, especially in lending. Banks that proactively set H&I targets in close cooperation with Risk management gain more concrete insights for managing H&I risks and can better assess the potential impact of climate and environmental events on their business.

In the article "The need to act: Climate & environmental indicators in banks' strategies", we discuss the challenges banks face when implementing H&I risks, KRIs and KPIs, how they can practically address these challenges and the benefits of taking appropriate action.