Banks need to take immediate measures to address climate change, said the Governor of the Central Bank of Cyprus (CBC) Constantinos Herodotou, during a conference on climate change held on Monday in Nicosia, highlighting challenges faced by banks, the changes in the regulatory framework and the supervisory actions taken so far by the European Central Bank and the Central Bank of Cyprus.

According to a CBC press release, in his keynote speech, Herodotou said that climate risk poses a significant challenge for the banking sector, through both physical risks and transition risks, and in this respect, banks should step up their efforts to embed climate risk into their risk management practices and policies, analyse and segment their portfolios, understand their customers’ transition strategies and collect climate related information on collaterals.

He added that the management of climate risk by banks is also on the top of the supervisory agenda, being one of the three supervisory priorities of the SSM for the years 2023 to 2025, while at the same time, the roadmaps of the European Supervisory Authorities embed climate and environmental risks horizontally in all banking and investment products and activities as part of their 2023 work program, by updating and enhancing all relevant parts of the supervisory and regulatory framework.

Referring to the regulatory framework, Herodotou said that the key direction of the EU is to regulate the green transition of the banks and enhance transparency through uniform disclosure requirements, with the aim of acting as a constructive pillar towards the achievement of the European green policies, which aim at reaching climate neutrality by 2050.

Green financial markets are growing rapidly due to increased volumes of euro area ESG funds and green bonds, he continued, with ESG assets under management having almost doubled from approximately 0.8 trillion euro in 2019 to 1.6 trillion euro in 2021, and noted that given the financial stability risks stemming from climate change it is important to promote products that help to green the economy.

The CBC Governor added that another key milestone is the review of the Mortgage Credit Directive, whereby, the Commission explores ways to support the uptake of energy efficient mortgages, the so-called ‘green mortgages’, which constitute an important development for an inclusive and sustainable finance framework, noting that the ECB has set deadlines for banks to progressively meet all supervisory expectations by the end of 2024.

In terms of actions taken by the Central Bank of Cyprus in this area, Herodotou said that a horizontal review was carried out in 2021 where institutions were requested to perform a self-assessment on their practices on climate related and environmental risks against the expectations set out in the Guide issued by the ECB.

He added that the exercise revealed that significant efforts are needed as only minimal action had been taken up to that date, and that the CBC subsequently requested that the less significant institutions develop an implementation plan in order to advance the management of climate related and environmental risks.

Furthermore, the key findings from the evaluation were communicated to the banks with a request for them to address the key shortcomings and either re-submit their implementation plans accordingly, or submit a progress report with a more detailed timeline in order to enable us to primarily assess their operationalisation as well as their ability to be in line with ECB’s deadlines on the topic.

“The CBC, in line with the supervisory priorities of the SSM and the EBA, is committed to take further actions in order to ensure that the Cyprus banking system is in line with the ECB’s guidelines and deadlines in relation to the transition to a low-carbon economy,” stressed Herodotou, adding that for the less significant institutions, the aim is for these guidelines and deadlines to be applied in a manner that is proportionate to their nature, scale and complexity of their activities.

He also said that the fact that certain Cyprus banks have started making tangible steps towards their climate change transition is a positive development, nevertheless, as Cyprus banks are still early on the learning curve and behind their European peers, he urged them to "act faster and more decisively" to meet supervisory expectations of incorporating climate-related risks into their overall risk management frameworks.

According to Herodotou, the CBC is leading the effort of financial literacy in the country, adding that the ability of individuals to understand and manage their finances prudently and effectively, extends to sustainability issues. “With the market trends focusing on green bonds and green loans, as well as the risk of greenwashing, it is sine qua non for individuals to develop skills and acquire knowledge on regulations, norms and standards for products and services with sustainable characteristics, in order to make prudent and informed decisions about financial matters”, he added.

He also said that the CBC has been leading and coordinating the work of the ad-hoc Committee which formulated a National Strategy for the promotion of financial literacy and financial education in Cyprus and now intends to utilise its leading role at the ad-hoc Committee to ensure that individuals understand sustainable financial products and their use for promoting sustainable development goals.

Moreover, he said the CBC is a big supporter of the Global Money Week in Cyprus, a public-awareness campaign coordinated by the OECD annually that aims to promote information campaigns including sustainable finance products, playing a key role in the integration of ESG factors into the financial decisions of individuals.

“The challenges I have referred to, require immediate action and significant up-front investment before reaping the benefits. Complacency is not a viable option. We are confident that the Cyprus banking sector will adhere to all relevant regulatory and supervisory expectations and remain resilient towards climate and environmental risks,” concluded the CBC Governor.