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In 2021, the Central Bank initiated a survey on the impact of climate-related and environmental risks on credit institutions. The questionnaire consisted of 15 questions, thematically divided into two groups: I. Policiesand procedures and II. Sustainability financing.

The survey showed that banks considered the banking sector had a key role in combating climate change and that climate change-related developments will impact the banking sector in Montenegro at an aggregate level. Several banks believed this impact would be significant, while no bank considered these developments to have no effect on their operations. Despite this, most banks had not assessed their exposure to climate change. Specifically, only two banks conducted such an assessment during this period—one had a Framework for managing environmental and social risks in place, while three banks were in the process of establishing such a framework. Banks cited uncertainty, lack of data, and preliminary assessments indicating limited exposure as reasons for not performing assessments. Three banks incorporated a climate change strategy in their business strategy, while two were in the process of preparing such a strategy.

Parent banks of two banks operating in Montenegro declared that they had signed the Principles for responsible banking, while one bank was in the process of doing so. Two banks applied environmental and social risk management principles in their investments, and another two were working on adopting and implementing these principles.

Two banks analysed and assessed the exposure of their portfolios to climate-related risks, while three were in the process of doing so. One bank conducted this assessment as part of preparations for stress testing (climate-related risk resilience tests or scenario analysis). Banks identified the energy sector as the sector with the highest physical/transition risks from climate change, followed by agriculture, transport, and tourism. Banks saw the banking sector’s role in the transition to a low-carbon economy as providing favourable financing for green and sustainable economic projects. All banks identified opportunities for development through offering green financial products and services. These opportunities were seen in financing renewable energy projects, energy efficiency, credits for clean technologies and agricultural production. Most banks did not have any green products in their offer and those that did mainly offered loans for improving energy efficiency. Several banks did not consider climate-related risks in the credit approval process, though some were preparing necessary procedures and policies or had already defined projects they had not financed due to environmental impact.

The next survey was conducted in 2023. The questionnaire contained 25 questions, thematically divided into two groups: I. Policies and procedures and II. Sustainability financing.

Analysis of the survey results showed progress and strong commitment by banks to include climate-related and environmental factors in their business strategies. Most banks recognized the need to manage climate-related and environmental risks in their strategies, followed European recommendations and best practices in this area, and had an organisational unit in place or a designated person responsible for monitoring climate-related and environmental risks.

Six out of eleven banks offered products promoting green financing, all focusing on improving household energy efficiency. Two banks assessed clients’ climate and environmental risks through questionnaires during credit approval, four banks considered these risks during lending, and one bank invested in green bonds.

Four banks analysed and assessed the exposure of their portfolios to climate-related and environmental risks. As part of risk assessments, they defined exposure limits for industries impacted by climate-related and environmental changes (ESG exclusion lists). Additionally, four banks included climate and environmental risk assessments when evaluating large exposures to single or related client groups.

Sectors identified as most affected by climate and environmental risks included Energy supply and production (five banks), Agriculture, fisheries and forestry (three banks), Construction (three banks), and Mining and quarrying (two banks).

Six banks assessed their exposure to climate-related and environmental risks as low, while five assessed it as medium. Seven banks identified the highest exposure in the corporate sector; the household sector had medium exposure, and investments in green bonds were assessed as least risky.

One bank assessed exposure to key physical risks (floods, fires, earthquakes, etc.). However, no bank used geographic collateral mapping or applied physical risk scoring models to new or existing collateral, nor did they use vulnerability analyses or stress testing in assessing exposure to climate and environmental risks.

The 2024 survey expanded to include questions related not only to climate change but also to other ESG principles. The questionnaire was divided into six thematic areas: I. Strategy and governance, II. Policies and procedures, III. Organizational structure and capacity, IV. Reporting and disclosure, V. Sustainability financing, and VI. Green taxonomies.

The analysis showed that four banks have a developed ESG or Sustainability strategy, with two integrating gender equality issues, and six banks incorporating ESG factors and risks (including climate-related risks) into their risk management strategies.

Six banks consider ESG factors when making investment/lending decisions. When deciding, six banks consider environmental issues the most important ESG factor, including climate-related risks; four banks consider corporate governance the most important, and one bank prioritizes social issues.

Six banks survey clients on climate-related and environmental risks as well as other ESG factors using dedicated risk assessment questionnaires, a notable improvement compared to the previous survey that showed that only two banks had prepared such questionnaires. However, only one bank uses non-financial reports from corporate clients to obtain relevant ESG information.

No bank required an Energy Performance Certificate (EPC) for projects as a lending criterion for legal entities, but seven banks planned to implement this in the future.

Only two banks provided incentives to companies adopting sustainable and socially responsible practices.

As previous surveys showed, most banks have an organisational unit or responsible person monitoring climate-related and environmental risks, as well as a unit responsible for implementing ESG policies and procedures.

Six banks do not offer sustainable finance products; one bank offers environmental loans to micro-, small, and medium-sized enterprises. Two banks offer environmental credit cards, one finances green buildings, and five finance renewable energy.

Only one bank assesses its exposure to major physical risks (floods, fires, seismic zones, and the like) to estimate potential portfolio impacts via value adjustments, while others plan to conduct such assessments. Additionally, two banks (an increase from the previous survey) perform geographic collateral mapping and apply physical risk scoring for new and existing collateral; five banks plan to implement geographic collateral mapping in the near future.

Two banks use sensitivity analyses, simulation exercises, and stress-testing for assessing exposure to climate and environmental risks.

Investment in green bonds has remained unchanged since the first survey, with one bank still investing in these bonds.

Over the past three years, three banks granted loans or invested in companies that reduced material consumption per unit of product; two banks lent to and/or invested in companies that reduced soil, water, and air pollution or noise; one bank lent to and/or invested in companies that replaced some production inputs with more sustainable ones; three banks lent to and/or invested in companies that replaced fossil energy with renewables; and two banks lent to and/or invested in companies that increased recycling of waste, water, or materials in use or sale.

Out of eleven banks, two were not familiar with the EU taxonomy for classifying economic activities as green or sustainable, while three banks, part of EU-based banking groups, have been reporting to their parent banks on EU taxonomy requirements.