EC Explores Integration of ESG Factors into Banking Framework in EU
EC published an interim study, prepared by BlackRock Financial Markets Advisory, that explores the development of tools and mechanisms for the integration of environmental, social and governance (ESG) factors into the prudential framework for banks in EU and into the business strategies and investment policies of banks. The interim study primarily evaluates the existing practices of banks and supervisors and is based on a preliminary analysis of the data collected so far. Due the ongoing nature of the analysis, this document is a work in progress and reflects the progress of the work as at submission date. The final study should be submitted to EC no later than April 01, 2021.
The study consists of the collection and aggregation of information from as wide a range of representative stakeholders as possible, to reflect a full spectrum of views. Three stakeholder perimeter groups were defined: banks; supervisors and regulators; and international organizations, civil society organizations, and other stakeholders. The study identified and covered nearly 151 stakeholders to provide a comprehensive overview of the state-of-play for the following:
- Modalities of integrating ESG risks into EU banks’ risk management processes—The study includes an overview of the results of the stocktaking exercise on the way banks deal with ESG risks. It includes a first preliminary overview of possible arrangements, processes, mechanisms, and strategies to be implemented by EU banks to map, assess, and manage ESG risks.
- Modalities of integrating ESG risks into EU prudential supervision—The study includes an overview of the results of the stocktaking exercise on national supervisory frameworks and practices for the integration of ESG risks into prudential supervision. It includes a preliminary overview of the tools and mechanisms for the integration of ESG risks into the EU prudential supervision.
- Modalities of integrating ESG objectives into EU banks' business strategies and investment policies—The study provides an overview of the stocktaking exercise on bank strategies to integrate ESG factors and foster long-termism in their lending and investment activity in response to green/sustainable funding needs. This includes an analysis of the state-of-play of green finance and of the market for responsible or sustainable investment at EU and global levels, including a mapping of all available green or sustainable financial instruments, products, and services and their impact on the balance sheets of banks in EU. Furthermore, the study includes first overview of impediments to the development of a well-functioning EU market for green finance and for responsible investment, a preliminary overview of the appropriate instruments and strategies to promote the scaling-up of green finance and the market for sustainable financial products, and a preliminary overview of how to enhance the ability of banks in understanding how ESG objectives can translate into financial opportunities.
Keywords: Europe, EU, Banking, ESG, Climate Change Risk, Sustainable Finance, EC
Michael Denton, PhD, PE
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.
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
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