Featured Product

    EBA Seeks Views on Management and Supervision of ESG Risks

    November 03, 2020

    EBA published a discussion paper that sets out a comprehensive proposal on how environmental, social, and governance (ESG) factors and risks could be included in the regulatory and supervisory framework for credit institutions and investment firms. The Capital Requirements Directive (CRD) 5 and the Investment Firm Directive (IFD) mandate EBA to develop a report assessing the potential inclusion of ESG risks in the review and evaluation performed by competent authorities and elaborating on the arrangements, processes, mechanisms, and strategies to be implemented by institutions to identify, assess, and manage ESG risks. The purpose of this discussion paper is to present the understanding of EBA on the relevance of ESG risks for a sound functioning of the financial sector and to collect stakeholder feedback with a view to further informing the report of EBA. The comment period for this discussion paper ends on February 03, 2021 and the report is expected to be delivered in June 2021.

    The discussion paper elaborates on the relevance of ESG risks for the financial sector and provides a uniform definition of ESG factors and ESG risks, including definitions of physical risks and transition risks as the main transmission channels for environmental risks. The discussion paper includes proposals for common definitions of ESG risks to credit institutions and investment firms as risks that stem from the current or prospective impact of ESG factors on its counterparties. In the discussion paper, ESG factors and ESG risks are identified and explained, giving particular consideration to risks stemming from environmental factors and especially climate change, reflecting ongoing initiatives and progress achieved by institutions and supervisors on this particular topic over the recent years. Social and governance factors are also included in the analysis, in accordance with the EBA legal mandates, and the paper explores why and how these factors can also be sources of risk for institutions. The paper also defines, elaborates, and presents examples to substantiate the relevance of ESG risks for the financial sector. One example is also dedicated to social impact triggered by the COVID-19 pandemic. As a third transmission channel for ESG risks, this discussion paper also identifies liability risks as the financial risks stemming from the exposure of institutions to counterparties potentially held accountable for the negative impact of their activities on ESG factors.

    The paper also presents a non-exhaustive list of quantitative and qualitative definitions, indicators, and metrics for a non-exhaustive list of ESG factors, together with a description of several tools and methodologies that can support the identification, evaluation, and assessment of ESG risks, namely the alignment method, risk framework method, and the exposure method. The methods may be used to better understand and compare the interaction of ESG risks in given exposures and portfolios. Together with the progress made in the definition of common taxonomies (like the EU Taxonomy Regulation), these analytical tools can help overcome some of the challenges for the assessment of ESG risks. The discussion paper argues that the impact of ESG risks materializes in the form of existing prudential risks (such as credit risk, market risk, operational risk). After presenting the rationale for the incorporation of ESG risks in the institution’s business strategy and business processes, the paper includes several policy recommendations regarding the way in which institutions can embed ESG risks in their internal governance and risk management frameworks in a proportionate manner. Finally, the paper elaborates on the effective way to proportionately reflect ESG risks in the supervisory review for credit institutions and makes several policy recommendations in this respect.

     

    Related Links

    Comment Due Date: February 03, 2021

    Keywords: Europe, EU, Banking, Securities, COVID-19, ESG, Climate Change Risk, CRD5, IFD, Basel, Proportionality, Sustainable Finance, EBA

    Featured Experts
    Related Articles
    News

    OSFI Outlines Prudential Policy Priorities for Coming Months

    OSFI has set out the near-term priorities for federally regulated financial institutions and federally regulated private pension plans for the coming months until March 31, 2022.

    May 06, 2021 WebPage Regulatory News
    News

    BIS Announces TechSprint on Innovative Green Finance Solutions

    Under the Italian G20 Presidency, BIS Innovation Hub and the Italian central bank BDI launched the second edition of the G20 TechSprint on the lookout for innovative solutions to resolve operational problems in green and sustainable finance.

    May 06, 2021 WebPage Regulatory News
    News

    EBA Proposed Regulatory Standards for Central Database on AML/CFT

    EBA proposed the regulatory technical standards on a central database on anti-money laundering and countering the financing of terrorism (AML/CFT) in EU.

    May 06, 2021 WebPage Regulatory News
    News

    ECB Responds to EC Consultation on Crisis Management Framework

    ECB published its response to the targeted EC consultation on the review of the bank crisis management and deposit insurance framework in EU.

    May 06, 2021 WebPage Regulatory News
    News

    ACPR Publishes Version 1.0.0 of RUBA Taxonomy

    ACPR published Version 1.0.0 of the RUBA taxonomy, which will come into force from the decree of January 31, 2022.

    May 06, 2021 WebPage Regulatory News
    News

    BCBS, CPMI, and IOSCO to Survey Market Participants on Margin Calls

    BCBS, CPMI, and IOSCO (the Committees) are inviting entities that participate in market infrastructures and securities markets through an intermediary as well as non-bank intermediaries to complete voluntary surveys on the use of margin calls.

    May 05, 2021 WebPage Regulatory News
    News

    ECB Amends Decision on TLTRO III

    ECB published Decision 2021/752 to amend Decision 2019/1311 on the third series of targeted longer-term refinancing operations or TLTRO III.

    May 05, 2021 WebPage Regulatory News
    News

    Central Bank of Ireland Issues Draft Template for AnaCredit Reporting

    The Central Bank of Ireland published Version 2.7 of the draft credit data template and rules for monthly AnaCredit reporting by banks.

    May 05, 2021 WebPage Regulatory News
    News

    OSFI Consults on Revisions to BCAR and Leverage Requirements Returns

    OSFI proposed revisions to the Basel Capital Adequacy Reporting (BCAR) and leverage requirements returns for the 2023 reporting, with the comment period ending on July 09, 2021.

    May 04, 2021 WebPage Regulatory News
    News

    EBA Seeks Views on Revisions to Nonperforming Loan Data Templates

    EBA published a discussion paper on review of the standardized nonperforming loans (NPL) transaction data templates, along with the proposed revised NPL data templates.

    May 04, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6936