Featured Product

    ESMA to Develop Indicators for Monitoring Climate Risk

    February 15, 2022

    The European Securities and Markets Authority (ESMA) published the first trends, risks, and vulnerabilities report for 2022. The report presents the risk dashboard and covers the structural developments in market-based finance, sustainable finance, and crypto-asset markets. ESMA included, for the first time, environmental risk as a category in its risk dashboard while the statistical annex to the report covers the new risk indicators on climate-related disclosures, reputational risk of firms, and carbon markets in the European Union. As part this risk analysis, ESMA also published special features, including one on monitoring environmental risks and another on text mining environmental, social, and governance (ESG) disclosures in rating agency press releases.

    As per the special feature on monitoring environmental risks in the European Union markets, proposal is to integrate climate risk as a new risk category alongside the existing liquidity, market, credit, contagion and operational risk categories in the risk assessment and monitoring framework. This feature article underpins the work of ESMA in the area of risk analysis by providing a comprehensive framework through which climate risks can be monitored in the context of the securities markets in European Union. It also highlights some of the challenges specific to risks stemming from climate change. This new risk category is intended to capture physical and transition risk drivers and their mitigants, in addition to the potential risks associated with green finance. With the addition of climate risk as a new risk category into the regular ESMA risk assessment, three core risks have been identified, which relate to abrupt changes in market sentiment, greenwashing, and weather-related hazards. ESMA aims to focus its analytical efforts on developing climate-specific risk monitoring indicators. Policy measures ensuring that investors and financial market participants factor the risks associated with ESG factors into their decision making can further help to channel savings into sustainable investments. ESMA aims to extend its quantitative analysis to empirically assess the probability, impact, and potential losses stemming from climate risks over time. 

    The second key feature assesses the implementation of ESMA guidelines on the disclosure of ESG factors in the press releases of credit rating agencies. The assessment was conducted by applying natural language processing techniques to a unique dataset of over 64,000 press releases that were published between January 01, 2020 and December 30, 2020. ESMA found that the overall level of disclosures has increased since the introduction of the guidelines; however, there is still room for further improvement, as the extent of ESG disclosures differs significantly across both credit rating agencies and ESG factors, especially environmental topics. ESMA also observed divergences in disclosures for rated entities that are highly exposed to ESG factors, relative to their sector peers. Based on the assessment, ESMA will consider the appropriate supervisory and policy tools to enhance transparency in this area. In 2022, ESMA plans to work on how ESG factors are incorporated by credit rating agencies into their methodologies and share its findings with the European Commission. ESMA will continue to engage with the rating agencies to understand the underlying drivers of the observed heterogeneity and to ensure that the guidelines are implemented consistently. ESMA is also in the process of conducting a Call for Evidence to gather information on the market structure, revenue, and product offerings for ESG rating providers in the European Union, the results for which are expected before the second quarter of 2022.  


    Related Links


    Keywords: Europe, EU, Banking, Securities, Credit Risk, Market Risk, ESG, Climate Change Risk, Cryptoassets, Sustainable Finance, Risk Dashboard, ESMA

    Featured Experts
    Related Articles

    CFPB Finalizes Rule on Small Business Lending Data Collection

    The Consumer Financial Protection Bureau (CFPB) published a final rule that sets out data collection requirements on small business lending, under section 1071 of the Dodd-Frank Act.

    March 30, 2023 WebPage Regulatory News

    BCBS to Consult on Pillar 3 Climate Risk Disclosures by End of 2023

    The Bank for International Settlements (BIS) published a summary of the recent Basel Committee (BCBS) meetings.

    March 23, 2023 WebPage Regulatory News

    FINMA Approves Merger of Credit Suisse and UBS

    The Swiss Financial Market Supervisory Authority (FINMA) has approved the takeover of Credit Suisse by UBS.

    March 21, 2023 WebPage Regulatory News

    BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks

    The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.

    March 13, 2023 WebPage Regulatory News

    US Congress Report Examines Data Privacy and Cybersecurity Regulations

    The U.S. Congressional Research Service published a report on banking, data privacy, and cybersecurity regulation.

    March 13, 2023 WebPage Regulatory News

    OSFI Finalizes on Climate Risk Guideline, Issues Other Updates

    The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.

    March 12, 2023 WebPage Regulatory News

    EU to Conduct One-Off Scenario Analysis to Assess Transition Risk

    The European authorities recently made multiple announcements that impact the banking sector.

    March 10, 2023 WebPage Regulatory News

    APRA Assesses Macro-Prudential Policy Settings, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) published an information paper that assesses its macro-prudential policy settings aimed at promoting stability at a systemic level.

    March 07, 2023 WebPage Regulatory News

    BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending

    BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.

    March 03, 2023 WebPage Regulatory News

    HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks

    The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.

    March 02, 2023 WebPage Regulatory News
    RESULTS 1 - 10 OF 8810