The recognition of climate change as a systemic risk to the global economy has further intensified regulatory and supervisory focus on monitoring of the environmental, social, and governance (ESG) risks. The European Banking Authority (EBA), the banking regulator in European Union, has instituted a sequenced and comprehensive approach to integrate ESG considerations into the regulatory framework for banks. As part of this strategy, EBA recently initiated an ad-hoc data collection from larger banks for better monitoring of ESG risks and proposed the draft templates and associated guidance for collecting climate-related data from banks, as part of the one-off Fit-for-55 climate risk scenario analysis.
These recent developments are part of the ESG roadmap, which the EBA had published in December 2022. The roadmap outlined the objectives and timelines for delivering ESG mandates and tasks for the years to come. As indicated in the roadmap, in addition to the ESG-related stress testing and disclosures, the EBA initiatives include incorporating ESG considerations into the prudential framework for banks and investment firms, addressing greenwashing, understanding market practices on green retail loans and mortgages, and enhancing availability of ESG data and quantification of ESG risks.
Proposed templates for one-off climate risk scenario analysis
In line with the priorities stated in the ESG roadmap, in the third week of July 2023, the EBA issued draft templates and the associated guidance for collecting data from banks for a one-off climate scenario analysis exercise. The EBA will conduct this exercise with the other European Supervisory Authorities (ESAs) and with the support of the European Central Bank (ECB) and the European Systemic Risk Board (ESRB). The draft templates are designed to collect climate-related and financial information on credit, market, and real estate risks. Banks are expected to report aggregated and counterparty level data as of December 2022. Among others, the aim is to assess concentration risk of large climate exposures, capture amplification mechanisms, and assess second-round effects. The feedback period for this exercise will end on October 11, 2023. The one-off Fit-for-55 climate risk scenario analysis is expected to start by the end of 2023, with the publication of results envisaged by the first quarter of 2025. Nearly 70 banks will take part in this exercise (same banks as those included in the 2023 EU-wide stress test). However, the competent authorities might request other banks in their respective jurisdictions to participate.
Ad-hoc data collection on ESG risks
In another related development, the EBA published the decision on an ad-hoc collection of ESG data from large, listed institutions based on their Pillar 3 quantitative disclosures on ESG risks. The technical package supporting the collection of this ESG ad-hoc collection has been made available, as part of the reporting framework 3.3. The ad-hoc data collection will provide competent authorities with data to monitor ESG risks and support the EBA in fulfilling its ESG mandates, including to set up a risk monitoring framework and to contribute to the European Commission Strategy for financing the transition to a sustainable economy. The data collection will be discontinued once a supervisory reporting framework on ESG risks is in place. The reference dates for the first annual and semi-annual submissions are December 31, 2023 and June 30, 2024, respectively
- Proposed Climate Data Templates
- Decision on Ad-hoc Data Collection
- Reporting Framework 3.3
- ESG Roadmap Priorities (PDF)
Visit Moody's Analytics Climate and ESG Risk Microsite to learn how you can proactively incorporate climate and ESG insights into your risk assessment process.
Keywords: Europe, EU, Banking, ESG, Climate Change Risk, Scenario Analysis, Stress Testing, Disclosures, Greenwashing, CRR3, Reporting, Basel, EBA
Previous ArticleImplementation Status of Final Basel III Reforms Varies Across Globe
The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.
Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.
The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.
At the global level, supervisory efforts are increasingly focused on addressing climate risks via better quality data and innovative use of technologies such as generative artificial intelligence (AI) and blockchain.
The finalization of the IFRS sustainability disclosure standards in late June 2023 has brought to the forefront the themes of the harmonization of sustainability disclosures
The European Banking Authority (EBA) recently issued several regulatory publications impacting the banking sector.
The Basel Committee on Banking Supervision (BCBS) launched a consultation on revisions to the core principles for effective banking supervision, with the comment period ending on October 06, 2023.
The U.S. banking agencies (FDIC, FED, and OCC) recently proposed rules implementing the final Basel III reforms, also known as the Basel III Endgame.
The Financial Stability Board (FSB) recently published the second annual progress report on the July 2021 roadmap to address climate-related financial risks.
The target timelines for implementation of the final Basel III—also called by some as Basel IV or Basel 3.1—reforms vary significantly worldwide.