ISDA and the Association for Financial Markets in Europe (AFME) jointly responded to the ECB consultation on the guide to climate and environmental risks, which details how such risks should be managed by banks. As part of the submitted comments, ISDA and AFME suggested that ECB should postpone the supervisory dialog by one year (2022) and adapt the implementation calendar based on the specified rationale. The industry bodies advocated that the level of application of this guide should be at the group consolidated level and that better proportionality should be taken into account, along with the risk materiality concept already introduced in the guide.
The response states that guide should clarify that, for the purpose of the initial gap analysis, Joint Supervisory Team outcomes should serve as non-binding opinions to support banks in promptly adapting their practices and that these opinions should not lead to supervisory prudential add-ons, for example, via Supervisory Review and Evaluation Process (SREP) in the primary instance. In the longer term, ECB should acknowledge that climate and environmental factors can have both positive and negative effects, potentially acting as risk mitigators or risk drivers. Consequently, the ECB guidance should refrain from promoting or applying any negative implication on capital of these factors until EBA finalizes its assessment or legislators adapt the approach as level 1 regulation. Additionally, banks should not have to adapt their pricing to take climate risk into account, as methodologies are still at too early a stage of development. This is because, as long as a client’s environmental and climate related performance cannot be quantified by a credit rating, it cannot be linked to the client's credit risk. ECB should also confirm that the guide does not require banks to set up a separate governance structure for climate risk and that existing governance may incorporate climate risk, unless a bank deems it appropriate for its specific governance structure
The response suggests that ECB should clarify that the main focus of the guide should be on financial materiality (impact of climate-related and environmental risks to the bank) and, more clearly, set out the way in which banks take into account the effects their operations could have on the environment and to what degree. Regarding disclosures, ISDA and AFME support the ECB proposal to apply a recognized international reporting framework, namely the Task Force on Climate-related Financial Disclosures (TCFD), which many banks are already reporting voluntarily, yet the guide refers to the Non-Financial Reporting Directive (NFRD). Since EC's non-binding guidelines to NFRD have gone beyond TCFD recommendations in some instances, ISDA and AFME would welcome a clarification that ECB does not intend for the "non-binding" guidelines to become de facto mandatory via this guide. To address the current lack of data and difficulties to calculate scope 3 emissions, a phase-in by sectors for scope 3 emissions should be considered, to come into force when the methodologies are agreed and disclosures are adequately standardized. Finally, ISDA and AFME request alignment between the disclosure requirements, the requirements under the NFRD revision in 2021, and the EBA Pillar 3 requirements in 2022. Therefore, in finalizing the guide, it would be useful if ECB could set out the future intentions for incorporating changes and updates to existing disclosure requirements to help banks forward-plan. Meanwhile, banks should be given flexibility to build reliable KPIs on follow-up to climate-related risks and implementation of climate strategies until the other requirements become clear.
Keywords: Europe, EU, Banking, ESG, Climate Change Risk, Sustainable Finance, Disclosures, CRR2, Basel, Proportionality, AFME, ECB, ISDA
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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