EBA embarks on ESG risk consultation

EBA embarks on ESG risk consultation

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The European Banking Authority (EBA) published today a Discussion Paper on Environmental, Social and Governance (ESG) risks management and supervision aiming to collect feedback for the preparation of its final report on the topic.

The Discussion Paper provides a comprehensive proposal on how ESG factors and ESG risks could be included in the regulatory and supervisory framework for credit institutions and investment firms. The consultation runs until 3 February 2021.

The main focus of this Discussion Paper is on the risks to which institutions are exposed via the impact of ESG factors on their counterparties. The Paper provides details on the risks stemming from environmental factors, especially climate change, and illustrates ongoing initiatives and progress achieved on this topic over the recent years.

The EBA sees the need for enhancing the incorporation of ESG risks into institutions’ business strategies and processes and proportionately incorporating them into their internal governance arrangements. This could be done by evaluating the long-term resilience of institutions’ business models, setting ESG risk-related objectives, engaging with customers and considering the development of sustainable products. Adjusting the business strategy of an institution to incorporate ESG risks as drivers of prudential risks should be considered as a progressive risk management tool to mitigate the potential impact of ESG risks.

Also the existing supervisory review processes might not sufficiently enable supervisors to understand the longer-term impact of ESG risks on future financial positions and related long-term vulnerabilities. Therefore, the Discussion Paper proposes to enhance the existing supervisory reviews with ESG factors and, more importantly, to introduce a new area of supervisory analysis and evaluation of the long-term resilience of the business model against the time horizon of the relevant public policies or broader transition trends.

Consultation process

Please note that the deadline for the submission of comments is 3 February 2021. All contributions received will be published following the end of the consultation, unless requested otherwise.

Legal basis and background

Article 98(8) of the Capital Requirements Directive (CRDV) and Article 35 of the Investment Firms Directive (IFD) mandate the EBA to develop a report providing uniform definitions of ESG risks, and appropriate qualitative and quantitative criteria (including stress test and scenario analysis) for the assessment of the impact of ESG risks on the financial stability of institutions in the short, medium and long term. They also mandate the EBA to elaborate on the arrangements, processes, mechanisms and strategies to be implemented by institutions to identify, assess and manage ESG risks and to assess the potential inclusion of ESG risks in the review and evaluation performed by competent authorities.

The feedback received through the Discussion Paper will inform the EBA final Report on management and supervision of ESG risks for credit institutions and investment firms. It will be also taken into account for the EBA’s ongoing work related to the fulfilment of its mandates to develop a technical standard implementing the ESG risks Pillar 3 disclosure requirements included in Part Eight of the Capital Requirements Regulation (CRR2 – Article 434a and 449a) and to assess whether a dedicated prudential treatment of exposures related to assets or activities associated substantially with environmental and/or social objectives would be justified as a component of Pillar 1 capital requirements (Article 501c of CRR 2), as explained in the EBA Action Plan on Sustainable Finance.

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