Bank of Israel: Environmental Considerations and Risks Should Be Part of Bank Company Risk Management | Barnea Jaffa Lande & Co.
The Bank of Israel released its last annual review at the end of May¹. The review includes an announcement by Bank Supervisor Yair Avidan that he encourages the formulation of comprehensive and up-to-date regulations on environmental risk management, given the high importance he places on the subject. of the environment.
Already at the end of 2020, the Supervisor of Banks sent a letter to banking establishments and credit card companies advising them of the launch of a process for regulating and monitoring the management of banks’ environmental risks². These clear statements can have important implications for many business entities, adding practical substance to the growing discourse on the environmental impact of companies and their adoption of ESG policies.
Importance of the regulation
At stake is a significant extension of regulatory measures that began in 2009, when banks were required to identify and assess their environmental risks as part of their risk management. Since 2009, banks have been required to publish reports on how they manage their environmental risks, as well as corporate responsibility reports that reflect, among other things, how they integrate social and environmental considerations into their decision making. decision.
In its annual review, the Bank of Israel says that the Paris Agreement and climate phenomena occurring in various parts of the world have increased global attention to climate change as a major environmental problem that must be addressed soon. now also in the financial context.
When analyzing banks’ exposure to climate risks, two categories were identified. The first concerns the physical risks associated with fears that banks will be directly affected by climate change phenomena, such as fires, floods, storms, etc. The second is the evolution of risks associated with the impact of climate change that require adjustments, such as as policies change, the adoption of green technologies, changes in market preferences, the shift to an economy. low carbon, etc.
Thus, the Bank of Israel emphasizes that environmental risks have financial and non-financial impacts on banking companies. Indeed, they are sometimes part of the risks that a bank already manages, such as credit risk, market risk, operational risk, compliance risk, legal risk, reputational risk and liquidity risk. , which, under extreme circumstances, can also escalate into risk stability.
The Bank of Israel also stresses the need to manage these risks from a long-term perspective, as dictated by the nature of the risks arising from climate change.
Environmental risks: International activities
As part of its prudential preparation, in October 2020, the Bank of Israel became a member of the Network for Greening the Financial System (NGFS). This network of central banks and supervisors works together to make the financial system greener. The NGFS has published a series of recommendations for dealing with climate risks that should serve as the basis for banking regulation on these issues.
The Bank of Israel also indicated in its annual review that the European Central Bank (ECB) announced that “large banking entities” directly under its supervision would be invited in 2021 to review their achievement of the expectations published by the ECB on climate risk. management and formulate action plans accordingly. In 2022, the ECB will conduct a full prudential review of banks’ working methods and take action if necessary.
During one of his speeches in September 2020, the Banking Supervisor also said that he viewed banking companies as important partners in the transition to a sustainable green economy. He added that this is an opportunity for the banking system to play a greater role in the socio-economic fabric of society by identifying, funding and promoting initiatives that have a positive social impact.
In order to encourage banking companies to channel capital towards financing “green” initiatives, the Bank of Israel’s annual review also refers to research carried out by a group of researchers from universities in Israel and of Hong Kong who found that banks that adopt policies based on environmental and social principles can create value for the companies that borrow from them. Research supports the hypothesis that companies can lower the price of their debt and stocks by engaging in ESG policies and entering into loan contracts with banks also committed to socio-environmental principles.
It appears that the measures envisaged by the Bank of Israel – to encourage and even oblige banks to develop an appetite for environmental risk, to adjust their credit policies and to channel investments towards the financing of green initiatives – could have an impact not only on banking companies. she supervises but also on their various clients. This demonstrates why these developments are important for the entire business sector which should plan and adapt to these developments.
⁴Amiram Dan, Gavious Ilanit, Jin Chao and Li Xinlei, The Economic Consequences of Firms’ Commitment to ESG Policies, February 2021.Available on SSRN.