As previously blogged, the European Commission (Commission) has launched a public consultation on the implementation of the final elements of the Basel III reforms.

Chapter 8 of the Commission consultation document covers sustainable finance.

The Commission notes three actions that have been identified by the co-legislators in the course of the recent legislative review of amendments to Capital Requirements Regulation and Directive (CRR/CRD IV), and which included:

  1. a mandate for the European Banking Authority (EBA) to assess the inclusion of the environmental, social and governance (ESG) risks in the supervisory review and evaluation process (SREP);
  2. a requirement for large, listed institutions to disclose ESG risks, including physical and transition risks; and
  3. a mandate for the EBA to assess on the basis of available data and the findings of the Commission High-Level Expert Group on Sustainable Finance, whether a dedicated prudential treatment of exposures related to assets or activities associated substantially with environmental and/or social objectives would be justified.

In this context, the Commission asks what – if any – further measures could be taken to incorporate ESG risks into prudential regulation, without pre-empting the ongoing work stemming from earlier mandates.

Separately, it should be noted that the Investment Firm Regulation and Directive (IFR/IFD), the final texts of which were adopted by the European Parliament in April 2019, mandate the EBA to prepare a report on the introduction of technical criteria related to exposures to activities associated substantially with ESG objectives for the SREP of risks, with a view to assessing the possible sources and effects of such risks on investment firms, taking into account the ESG taxonomy. Investment firms will be required to disclose information on ESG-related risks, physical risks and transition risks annually the first year and biannually the second year and thereafter.

The Commission will hold a public conference on 12 November 2019 to discuss the impact and challenges of implementing the final Basel III reforms in the EU. The deadline to submit comments to the ongoing consultation is 3 January 2020. Legislative proposals introducing the final Basel III standard in Union law, in the form of amendments to CRR/CRD IV legislation, are expected to be published by the Commission in mid-2020.