EBA published the Action Plan on sustainable finance for banks. The plan outlines the EBA approach and timeline for delivering mandates related to environmental, social, and governance (ESG) factors. It contains the sequenced approach of EBA, starting with key metrics, strategies, and risk management and moving toward scenario analysis and evidence for any adjustments to risk-weights. The plan also communicates key messages on the EBA policy direction and expectations from financial institutions in areas where action is needed now to support the move toward more sustainable finance in EU.
The objectives of EBA work on sustainable finance are linked with the overall objectives of contributing to the short, medium, and long-term stability and effectiveness of the financial system and include improving the current regulatory framework for institutions to foster their operations in a sustainable manner and introduce sustainability considerations in institutions’ strategy and risk management. The planned work also aims to provide supervisors with adequate tools to understand, monitor, and assess ESG risks in their supervisory practices. Considering the given and planned mandates of EBA from legislation and EC's action plan, the complexity of the topic, and the deadlines, EBA is expected to deliver a significant amount of work between 2019 and 2025. In addition to the specific mandates, there is a general mandate included in EBA Regulation on ESG risk monitoring, which fits well into its overall work of improving the stability of the banking sector. The following are the key EBA mandates under the sequenced approach:
- Strategy and risk management—The scope of this mandate is very wide and includes a comprehensive proposal, in the form of a report, for the management of ESG risks and their integration into governance, risk management (including scenario analysis and stress testing), and supervision. Given the complexity of this mandate, EBA will first publish a discussion paper in Q2-Q3 2020, seeking stakeholder feedback before completing the final report by the deadline of June 28, 2021. As envisaged in Article 98(8) of the Capital Requirements Directive 5 (CRD 5), based on the outcome of this report, EBA may issue guidelines on the uniform inclusion of ESG risks in the Supervisory Review and Evaluation Process (SREP) of competent authorities and may also amend or extend other policy products, including provisions for internal governance, loan origination, and outsourcing arrangements. The exact timing and nature of guidelines to institutions and supervisors will be determined by the report.
- Key metrics and disclosures—Following the mandate in Article 434a of the revised Capital Requirements Regulation (CRR 2), EBA is developing comprehensive technical standards to implement the disclosure requirements included in Part Eight of the CRR. The deadline to submit the technical standards to EC is June 2020. Although most of the disclosure requirements in Part Eight of the CRR are applicable from June 2021, there are some exceptions, such as the ESG-related disclosures, which will be applicable from June 2022. The ESG-related disclosures will build on existing work such as the guidelines on non-financial reporting, a supplement on reporting climate-related information, the EU taxonomy, and the FSB Task Force on Climate-related Financial Disclosures recommendations. These products will be used for an update of the technical standards that are planned for 2021.
- Stress testing and scenario analysis—EBA aims to develop a dedicated climate change stress test with the main objective of identifying banks’ vulnerabilities to climate-related risk and quantifying the relevance of the exposures that could be potentially hit by physical risk and transition risk. In the short term, as part of the regular risk assessment of EU banks, a sensitivity analysis for climate risks could be undertaken in the second half of 2020 for a sample of volunteering banks. The exercise would focus on transitional risks and consider a longer time horizon. In addition, EBA will provide guidance to banks and supervisors regarding banks’ own stress testing as part of the report developed under the mandate in Article 98 of CRD 5. As part of this work, the qualitative and quantitative criteria to assess the impact of ESG risks under scenarios with different severities will be explored. Following this report, EBA might update relevant guidelines related to risk management and stress testing.
- Prudential treatment—The mandate from Article 501c of CRR 2 asks EBA to assess if a dedicated prudential treatment of exposures related to assets or activities associated substantially with environmental and/or social objectives would be justified. The findings of this assessment should be summarized in a report. The scope of this mandate is quite comprehensive and it will require substantive data and quantitative analysis. Considering the complexity and potential impact of this work, EBA plans to conduct this work in two phases: it will first publish a discussion paper and then consider feedback received to finalize the report. The deadline for this report is in June 2025, thus providing EBA more time to collect relevant data and possibly benefit from the use of the new EU taxonomy on sustainable activities.
The rationale for this sequence is the need to understand institutions’ current business mix from a sustainability perspective, before measuring and managing it in relation to their chosen strategy, which can then be used for scenario analysis. The classification of assets considering the sustainability perspective too will then enable institutions and regulators to conduct empirical assessments of appropriate prudential treatment.
The action plan also highlights some key policy messages on the topic of sustainable finance to provide some clarity to relevant financial institutions on the high-level policy direction of EBA and expectations about ESG risks. These expectations emphasize three areas in which institutions are encouraged to consider taking steps—strategy and risk management, disclosure, and scenario analysis—before the EU legal framework is formally updated and the EBA regulatory mandates delivered. These areas have been agreed on by the EBA Board of Supervisors and will serve as the basis for the EBA work.
Keywords: Europe, EU, Banking, Sustainable Finance, ESG, Scenario Analysis, CRR/CRD, Climate Change Risk, Stress Testing, Action Plan, EC, EBA
Previous ArticleESMA Updates Q&A on Securitization Regulation in November 2019
The European Commission (EC) published the Delegated Regulation 2022/786 with regard to the liquidity coverage requirements for credit institutions under the Capital Requirements Regulation (CRR).
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying the criteria to identify shadow banking entities for the purposes of reporting large exposures.
The European Insurance and Occupational Pensions Authority (EIOPA) published a report assessing insurers' exposure to physical climate change risks
The Network for Greening the Financial System (NGFS) published two reports to aid central banks and regulators in their oversight of the financial sector and in their central bank operations
The European Commission (EC) published the results of a public consultation, held in October 2021, on the review of the Web Accessibility Directive.
The Monetary Authority of Singapore (MAS) and the SC-STS are jointly consulting, until June 10, 2022, on setting adjustment spreads for the conversion of legacy SOR contracts to SORA reference rate.
The Office of the Superintendent of Financial Institutions (OSFI) published the strategic plan for 2022-2025 and the departmental plan for 2022-23.
The European Banking Authority (EBA) is consulting, until August 31, 2022, on the draft implementing technical standards specifying requirements for the information that sellers of non-performing loans (NPLs) shall provide to prospective buyers.
The European Council and the Parliament reached an agreement on the revised Directive on security of network and information systems (NIS2 Directive).
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying information that crowdfunding service providers shall provide to investors on the calculation of credit scores and prices of crowdfunding offers.