ECB, EIOPA, and ESMA to Contribute Toward Sustainable Financial System
The European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA) published statements highlighting their contribution to a more sustainable financial system while the European Central Bank (ECB) published a pledge to climate change action. On the occasion of the 2021 United Nations Climate Change Conference (COP 26), ECB has set out actions to contribute, within its mandate, to goals of the Paris Agreement and to the efforts of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS); the actions relate to integrating climate risks into financial stability monitoring and prudential supervision of banks, exploring the effects of climate risks on the policy framework within its mandate, and bridging climate-related data gaps.
The ECB pledge complements the recent NGFS Glasgow Declaration, which outlines the collective global efforts of central banks and supervisors toward greening the financial system and managing climate risks. ECB pledged to:
- assess alignment of banks’ risk management and disclosure practices with supervisory expectations and take appropriate follow-up action. This is an ongoing assessment and the intermediate results are expected by the fourth quarter of 2021.
- develop the supervisory methodology for climate-related and environmental risks and all related supervisory requirements. The intermediate results are expected by the fourth quarter of 2021.
- conduct supervisory climate stress tests for banks and macro-prudential climate stress tests or scenario analyses for banks and other financial intermediaries in 2022.
- assess how credit rating agencies accepted by the Eurosystem credit assessment framework include climate risks in their credit ratings and consider developing minimum standards to ensure consistent inclusion of climate change risks in the internal credit ratings. The envisaged completion date for this pledge is the second quarter of 2022.
- develop climate change metrics and indicators to help bridge data gaps in the area of physical risks, the carbon footprint of financial institutions’ portfolios, and green financial instruments. The envisaged completion date for this pledge is fourth quarter of 2022.
- introduce climate disclosure requirements for private-sector assets used as collateral in Eurosystem monetary policy operations and for asset purchases as a new eligibility criterion or as a basis for differentiated treatment and adjust the rules for corporate-sector asset purchases to incorporate climate change criteria. Detailed plan on this will be formulated by the fourth quarter of 2022.
Additionally, EIOPA published a statement committing to support the insurance and pensions sectors in tackling climate change. EIOPA plans to deepen its work to integrate environmental, social and governance (ESG) risks in the prudential framework of insurers and pension funds, consolidate the macro- and micro-prudential risk assessment of ESG risks, promote sustainability disclosures, address protection gaps, and promote EIOPA as a hub for open source modeling and data. Along with this, EIOPA plans to finalize, in 2022, the first Europe-wide dashboard on the natural catastrophe insurance protection gap. Finally, in its statement, ESMA committed to contributing to a more sustainable financial system, as part of the European Green Deal and global efforts to deliver on the United Nations’ COP26 objectives on combatting climate change. Going forward, ESMA will:
- promote effective and consistent supervision across national competent authorities in relation to climate benchmarks and to the application of sustainability disclosures requirements for benchmarks.
- actively contribute to the development of sustainability reporting standards and foster common supervisory approaches in this area.
- assess the way credit rating agencies incorporate ESG factors in their methodologies for credit ratings and outlooks and how credit rating agencies ensure the robustness of their methodologies.
- review the suitability and product governance guidelines to incorporate sustainability factors.
- continue monitoring and assessing ESG-related market developments and risks and work on further integrating climate risks.
- prepare for possible supervisory responsibilities arising from the EU Green Bond Standard legislative proposal.
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Keywords: Europe, EU, Banking, Insurance, Securities, Climate Change Risk, ESG, Sustainable Finance, Green Finance, Paris Agreement, Disclosures, Stress Testing, Credit Rating Agencies, Green Bond Standard, NGFS, ECB, EIOPA, ESMA
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