Of the 399 entities in the banking, insurance and securities sectors surveyed, 381 provided responses that could be evaluated following a quality-check. The Survey Report analyses all results in detail and also contains a reference to BaFin´s Guidance Notice on Dealing with Sustainability Risks. Based on the self-assessment provided by the entities, it is clear that the first steps have been taken but that there is a need for further action.

High motivation

A noticeable positive factor is that almost all of the entities are aware of the topic of sustainability and have recognised the urgency of the issue. BaFin expressly welcomes the fact that the entities are not just considering climate and environmental risks but are also equally concerned with social factors and governance aspects.

Figure 1: Consideration of different sustainability risks (on average)

(c) BaFin

The entities’ primary concern is to avoid reputational damage and to identify and monitor sustainability risks. In addition, credit institutions are particularly keen to actively benefit from the opportunities arising from the transition to a sustainable economy. For the insurance industry, the active management of sustainability risks is of primary importance.

Relevance and materiality of sustainability risks

While almost all of the entities assume that sustainability risks have an effect on the known risk types, only some of them also consider this effect to be material. In this regard there are significant differences between the individual sectors which can be explained only to a certain extent by their different business models.
Credit institutions consider sustainability risks to be relevant in relation to credit risk (91%)¹ in particular. For insurance undertakings², sustainability is a factor in particular for market risk (92%) and underwriting risk (76%). Across all sectors, the assumption is that sustainability risks will affect the entity's own reputational risk as well as operational and strategic risks.

By contrast, only a few of the smaller and medium-sized credit institutions under BaFin's supervision included in the survey (unlike the significant institutions supervised directly by the ECB) currently view sustainability risks as material or as material drivers of risk types. This could be due to their business models. However, smaller institutions in particular could also be materially affected by sustainability risks in the event that they have concentration risks with respect to particular sectors of the economy or regional dependencies. The relatively late arrival of regulation for sustainability risks in the banking sector or the lack of methods for identifying and assessing these risks are possible other causes. The figure is higher for insurance undertakings, but is still only around 50% for reputational risk and less than 50% for all other risk types. Sustainability risks are most frequently assessed as material in the securities sector, in particular with respect to reputational risk (81%), strategic risk (65%) and market risk (45%).

The following diagrams illustrate the discrepancy:

Figure 2: Relevance of sustainability risks

(c) BaFin

Figure 3: Materiality of sustainability risks

(c) BaFin

Business and risk strategies

BaFin welcomes the fact that sustainability risks are already frequently taken into account in the entities' business strategies. However, only a small number of entities (12%) have so far decided to discontinue critical business areas completely for sustainability reasons. On the other hand, more than one-quarter (27%) of the entities have reduced operations in specific business areas as a result of sustainability risks.

Only a few credit institutions, and only around one-third of the insurance undertakings, investment firms and asset management companies surveyed, take into account sustainability risks when setting their risk appetite. In some cases, regional or sector-specific exclusions or limits have been imposed, but hardly any of the entities surveyed have gone further and extended their strategic planning horizon. There is a need to take action here, at least on the part of credit institutions and larger entities in the securities sector, since the EBA specifically encourages such extensions³ and related changes in the regulatory framework can be expected.

Responsibility within the entity

Sustainability is a management issue – this is reflected in the survey findings on the allocation of responsibilities within the entity. In almost all cases, credit institutions allocate responsibility for sustainability risks solely to the management board as a whole (96%), while insurance undertakings and entities in the securities sector often assign an additional area of responsibility to individual members of management. In BaFin's opinion, there are advantages in a clear allocation of responsibility to individuals, although the principle of the separation of functions must be observed.

Below management board level, many entities have already integrated sustainability risks into their existing structures. A small number of entities (5%) have created special units for this purpose.

Risk management and stress tests

The survey revealed room for improvement in relation to risk management. For example, only 31% of the credit institutions surveyed have so far incorporated sustainability risks in their internal risk management guidelines. Moreover, in most cases methods for identifying and evaluating sustainability risks are lacking. This is likely to be another reason why banks assess sustainability risks as material (or as material drivers) comparatively infrequently. As mentioned above, other reasons could be the specific business model of LSIs and, where relevant, the remaining term of outstanding loans, and thus the susceptibility of loans to sustainability risks.

Even now, it is more common in the insurance sector for undertakings to have methods for identifying, evaluating and managing sustainability risks at their disposal. The securities sector is also doing well; 77% of the entities surveyed said that they have the capability to manage sustainability risks. On the other hand, fewer entities in the securities sector were included in the survey as compared with the other financial sectors. This means that only limited comparisons can be made between the three financial sectors, even though BaFin's expectations in its Guidance Notice are in principle the same, always allowing for the sectors' differing business models.

Across all sectors, there are only a very few cases (on average 6%) in which internal capital is allocated to absorb losses from sustainability risks.

Figure 4: Methods of risk management vs. intention to manage risks

(c) BaFin

Only some of the entities are already employing sustainability-related stress tests. Where they are used – most frequently by entities within the insurance sector (23%) – the findings can also be used in many cases to derive strategic conclusions or incorporate them in risk management systems. This underlines the importance of these entity-specific tests already emphasised by BaFin in its Guidance Notice on Dealing with Sustainability Risks; they are a particularly appropriate means of estimating future risks and uncertain threats. BaFin therefore welcomes the fact that a comparatively large number of the entities surveyed (39% overall) are working on sustainability-related stress tests, and notes that insurance undertakings are expected to provide climate-related scenarios as part of the ORSA if those risks are material for them.

Outlook

The results of the survey show that nearly all of the entities surveyed are making efforts to address the topic of sustainability risks, although the progress made in implementing the necessary measures is heterogeneous. Many entities have some catching up to do on risk management procedures, in particular relating to the use of internal stress tests but also in strategic and organisational decision-making. Going forward, BaFin will continue to expect entities under its supervision to deal appropriately with sustainability risks and take the necessary measures. The report on the survey may also help the entities to assess their own progress, including in relation to their peers, and identify any need for action.
The full report is available below (see attachments in "additional information"). Towards the end of the year, BaFin is also planning to publish a supplementary report which will contain a more in-depth analysis of the treatment of sustainability risks by the insurance sector.

Footnotes: