ESAs published a joint letter and the individual responses to EC consultation on a renewed sustainable finance strategy as part of the European Green Deal. The EC consultation intended to collect opinions to feed into the work to help mobilize private investment in sustainable projects. In their joint response, ESAs welcome the consultation and support the ambition of EC to strengthen the European policy framework to enhance the resilience of the financial sector to environmental, social, and governance (ESG) risks. ESAs have highlighted the importance of ensuring user-friendly sustainability data to support better disclosures, a robust and proportionate regulatory framework to promote efficient risk management, and safe and transparent use of sustainable financial products by investors.
In its response, EBA agrees with a wide range of possible EU-level actions to support financing of the transition to a more sustainable European economy while appropriately managing the ESG risks in the financial sector. The following are some of the key highlights of the EBA response:
- A framework for enhanced and standardized disclosures of ESG-related information, by both corporations and banks, would have several advantages, including the potential to lengthen time horizons for decision-making processes. Policy actions should focus on setting principles or requirements ensuring comparability, relevance, and reliability of disclosures, while striking the right balance between EU efforts and the international dimension of financial markets on one side and between larger and smaller companies capacity (proportionality principle).
- Sustainability considerations could be further integrated in directives and regulations applicable to the banking sector (for example, Capital Requirements Directive and Regulation). For instance, having more specific sustainability-related governance provisions would also support building sufficient ESG expertise inside the regulated entities, which is currently lacking in many cases. In this respect, the different mandates that have been extended to EBA—inter alia under the CRR (Article 434a, Article 449a and Article 501c), the CRD (Article 98(8)), the IFD (Article 35), and the Regulation for ESG disclosures for financial services—will be instrumental to support the full incorporation of ESG risks by the banking sector.
- There would be a merit to investigate whether a specific framework for green securitization would be needed to assess the extent to which the specificities of green securitizations are sufficiently captured in the EU Green Bond Standard, to clarify the interaction between the securitization regulation and the Green Bond Standard, and to determine whether a deviation from the existing securitization framework would be appropriate. EBA could contribute with technical work on these issues in a similar manner as for the Simple, Transparent, and Standardized (STS) framework.
- Further EU-wide action is needed to facilitate corporates’ efforts to evolve so to manage the ESG risks that may affect their business models in the future. The EU can publish, for example, a guidance or a blueprint to allow such data initiatives to harmonize at the member state level and, if needed, set up an EU-wide platform for this purpose. Such an EU-wide centralized database can be built on the current industry experience and practices.
ESMA response covers a broad range of topics including strengthening the foundations for sustainable finance, increasing opportunities for financial institutions and corporates, and managing and reducing risks related to ESG factors. ESMA highlights that the future strategy on sustainable finance should aim to set up a robust and proportionate European regulatory framework that adequately supports the shift toward a more sustainable financial system. ESMA believes that facilitating access to sustainability data would constitute an essential contribution to putting sustainability at the forefront of the financial sector. In its response to the consultation, ESMA focused on the following aspects:
- There exists a lack of a standardized disclosure regime for issuers with respect to sustainability reporting. ESMA had brought this point to the attention of EC in response to the Non-Financial Reporting Directive consultation in June 2020 and notified its readiness to assist the EC regarding standard setting in this area.
- There exists a lack of legally binding definition and comparability among providers and of legal requirements to ensure transparency of underlying methodologies. In the joint letter to EC, it has been highlighted that this should be addressed by introducing minimum standards for ESG ratings and ensuring EU-level supervision of ESG rating providers.
- ESRB highlighted the growing need in Europe for methodologically robust and reliable ESG benchmarks that encompass the entire ESG spectrum, including social and governance aspects.
- Also highlighted is the need for the establishment of supervision of third-party verifiers of green bond standards at the European leveld.
- Another action area is the assessment of the effects of eco-labeling of products and whether broadening the scope of eco-labels to a wider range of financial products is necessary.
In its response to the EC consultation, EIOPA strongly supports the work being undertaken by EC to promote a sustainable financial environment. As part of its sustainable finance action plan, EIOPA will continue contributing to the work of EC on the various initiatives, including the climate protection gap and measures to address resilience gaps. EIOPA believes that the toolbox should be broadened for the insurance sector more generally, to cover the different sources of systemic risk. EIOPA points out that a comprehensive analysis of which macro-prudential instruments could be used to address the risks related to climate change is missing. EIOPA welcomed the action on integrating ESG risks and factors in Solvency II and the Insurance Distribution Directive.Further initiatives to provide guidance on the concrete implementation may be relevant with regard to:
- Promoting scenario analysis to translate climate change into financial risk assessment and developing consistent parameters for scenarios for own risk and solvency assessments that could be used and adopted, as appropriate, by insurers.
- The industry's adoption of a forward-looking approach in its risk assessment and business strategy. While climate change is unfolding over a medium to long term, increasing costs of natural catastrophe risks are impacting the insurance industry. The transition risk of revaluation of assets could arise suddenly, with important consequences, affecting potentially long-term illiquid investments.
- The development of an open data ecosystem on ESG risks and factors. If designed in a collective effort by private market participants and public authorities, feeding the data in a standardized and regular manner, this would help in improving risk assessment, devising preventive measures, and informing the need for residual risk transfer. The data could build on the existing databases from EC (for example, Joint Research Center) or European authorities (for example, European Environment Agency). EIOPA is, for example, preparing the release of a pilot dashboard on the natural catastrophe protection gap, with the aim to promote the risk assessment and inform the policy discussion. The potential for collecting insured (physical, non-physical) loss data by EIOPA may contribute to such a joint initiative.
- EBA Press Release
- ESMA Press Release
- EIOPA Press Release
- EBA Response to Consultation (PDF)
- ESMA Response to Consultation (PDF)
- EIOPA Response to Consultation (PDF)
- Joint Letter to EC (PDF)
- EC Consultation
Keywords: Europe, EU, Banking, Insurance, Securities, Sustainable Finance, Climate Change Risk, ESG, European Green Deal, CRR, Solvency II, Reporting, Disclosures, Basel, EC, ESAs
Previous ArticleBundesbank Updates Requirements for AnaCredit Reporting
The European Banking Authority (EBA) launched the 2023 European Union (EU)-wide stress test, published annual reports on minimum requirement for own funds and eligible liabilities (MREL) and high earners with data as of December 2021.
The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.
The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.