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    EC Consults on ESG Ratings and Sustainability Risks in Credit Ratings

    The European Commission (EC) published a call for evidence and a targeted consultation on the environmental, social, and governance (ESG) ratings and sustainability factors in credit ratings while a letter from the European Central Bank (ECB) outlines the work being done by Banking Supervision in the area of climate risk.

    The EC consultation on ESG ratings will help EC gain better insight on functioning of the market for ESG ratings as well as on how credit rating agencies incorporate ESG risks in their creditworthiness assessment. This consultation, which ends on June 06, 2022, seeks stakeholder views about the use of ESG ratings by market participants and the dynamics of the market, its functioning. and potential issues. It also seeks information on the potential costs of an intervention at the European Union level and views on the degree to which sustainability risks are captured in credit ratings. The consultation sets out questions related to the need and appropriate type of intervention. Responses from market participants will feed into an impact assessment, which will evaluate whether a policy initiative is needed on ESG ratings and sustainability factors in credit ratings. EC intends to prepare the impact assessment in 2022, with a view to proposing legislative or non-legislative initiatives in the first quarter of 2023.

    The ECB letter highlights that the 2022 Supervisory Review and Evaluation Process (SREP) will be marked by several key initiatives, further enhancing the supervision of climate-related and environmental risks. The first of these initiatives is the climate risk stress test, which was launched in January 2022 and is being conducted by a dedicated supervisory team. The second initiative is the thematic review of climate and other environmental risks. As part of this thematic review, the ECB Banking Supervision will be looking more closely at the risk management practices for both climate and environmental risks. The Banking Supervision is further building up relevant capacities of its supervisory teams and will start treating climate and environmental risks like any other risks. In 2022, the observations of the thematic review and of the climate stress test will be qualitatively integrated into the SREP scores for the first time, which may have an indirect impact on capital requirements. Targeted qualitative requirements may also be imposed. As part of the review, ECB Banking Supervision will also carefully check whether banks have followed up on any requirements that were issued last year.

     

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    Keywords: Europe, EU, Banking, Climate Change Risk, ESG, Sustainable Finance, ESG Ratings, Credit Rating Agency, Credit Ratings, Credit Risk, SREP, Impact Assessment, Stress Testing, Thematic Review, Banking Supervision, ECB, EC

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