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.
Related Links
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
Featured Experts
Emil Lopez
Credit risk modeling advisor; IFRS 9 researcher; data quality and risk reporting manager
James Partridge
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Nihil Patel
Data scientist; SaaS product designer; credit portfolio analyst and product strategist; portfolio modeler; correlation researcher
Previous Article
SEC Proposes Rules on Cyber Risk and Climate Risk DisclosuresRelated Articles
US Agencies Issue Several Regulatory and Reporting Updates
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
ECB Issues Multiple Reports and Regulatory Updates for Banks
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.
HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements
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.
EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR
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.
CBIRC Revises Measures on Corporate Governance Supervision
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.
HKMA Publications Address Sustainability Issues in Financial Sector
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
EBA Updates Address Basel and NPL Requirements for Banks
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.
ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
FCA Sets up ESG Committee, Imposes Penalties, and Issues Other Updates
The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.
FSB Reports Assess NBFI Sector and Progress on LIBOR Transition
The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.
