Environmental and climate-related risks within the FMI landscape

In 2023, the NBB has asked a sample of financial market infrastructures, custodians, payment transaction processors and critical service providers to complete a questionnaire on climate-related risks. The answers showed that the institutions are aware of climate-related risks and that these risks are adequately embedded in the governance framework. However, the inclusion of climate-related risks in the risk management framework and the business strategy requires further action.

All over the world, different types of weather events occur. What will happen in case the frequency and/or the severity of these extreme weather events continue to increase? Which risks and challenges will market infrastructures face and which measures do they take?

The Bank continues to monitor climate-related and environmental risks not only for banks and insurance companies⁽¹⁾ but also for financial market infrastructures (FMI), custodians, payment transaction processors and critical service providers (such as some providers of financial messaging services). After a first stocktake in late 2021/early 2022, when a sample of Belgian institutions active in these fields was requested to complete a questionnaire, the Bank decided to continue interaction with these institutions and to analyse climate-related and environmental risks in a structural manner. A set of general expectations regarding the management of climate-related risks at financial market infrastructures was published in the 2023 FMI report. In June 2023, a new questionnaire was sent to sample of financial market infrastructures (FMI), custodians, payment transaction processors and critical service providers. Based on the answers received, the Bank performed a global review of the maturity of these institutions by comparing the responses to the questionnaire with the expectations published in the 2023 FMI report. The questionnaires and analyses were structured around five assessment themes: materiality assessment, business strategy and environment, governance set-up, risk appetite and management and disclosures (see the 2023 FMI report for more information).

The assessment found that climate-related risks are adequately embedded in the governance framework of the institutions surveyed, thereby demonstrating their awareness of climate-related risks. From a governance perspective, climate-related risks have been embedded at different levels of the organisation, from the operational level to the board level (such as adjusting the mandates of board committees to include the responsibility for climate risks). Most institutions have an adequate to strong level of understanding of the materiality of climate-related risks as the institutions have processes in place to capture climate risks in their materiality assessment. However, there are substantial differences in terms of the extent to which these risks are embedded in the enterprise risk framework. Climate-related risks are at least embedded in a high-level or ad hoc fashion in the business strategy and risk management of the institutions concerned, but improvements are generally needed in order to achieve full, structural integration. At the moment of the survey, several institutions were already implementing or had plans to implement enhancements in these fields. We also notice some positive elements, such as climate-related risks are already adequately integrated into business continuity management. Further, certain institutions have developed key performance indicators (KPIs) and key risk indicators (KRIs) to monitor the impact of climate-related risks on their business while others are in the process of doing so. With some exceptions, existing KPIs and KRIs mainly relate to carbon footprint measurement. Most of the institutions surveyed do also publish on a regular basis a set of sustainability information, although this information is often still quite high level or at an early stage of development.

Climate risks are in general not considered as a separate risk category, but as a driver of other risk types. Institutions listed potential impacts from climate risks in the medium to long term; mainly relating to operational, business and reputational risks. In terms of potential business-specific effects, institutions identified many different possible impacts, ranging from higher costs and changes at the product level to business disruption and consequences for employee availability and reputation. But, the institutions mentioned several mitigating actions which were mainly being carried out in the areas of measuring and monitoring and energy (cost) savings, as well as through third party-related initiatives (e.g. factoring ESG aspects into the assessment of new suppliers and clients).

In the future, the NBB plans to continue the structural follow-up of climate risks; via global reviews (such as the 2023 review) as well as in-depth analyses of selected areas impacted by climate-related and environmental risks. Further, the NBB engages itself to contribute to international initiatives (e.g. at CPMI-IOSCO level) that are/will be organised within this field. 

⁽¹⁾ See the “Prudential regulation and supervision” section of the Bank’s Annual Report 2023, available at https://www.nbb.be/doc/ts/publications/nbbreport/2023/en/t1/report_2023_t1_complet.pdf.