On 3 November 2020, the European Banking Authority (EBA) issued a discussion paper on the management and supervision of environmental, social and governance (ESG) risks for credit institutions and investment firms.
In the discussion paper ESG factors and ESG risks are identified and explained, giving particular consideration to risks stemming from environmental factors and especially climate change, reflecting ongoing initiatives and progress achieved by institutions and supervisors on this particular topic over the recent years. Social and governance factors are included in the analysis, in accordance with the EBA’s legal mandates, and the paper explores why and how these factors can also be sources of risk for institutions.
Article 98(8) of the Capital Requirements Directive V (CRD V) and Article 35 of the Investment Firms Directive (IFD) mandate the EBA to develop a report providing uniform definitions of ESG risks, and appropriate qualitative and quantitative criteria (including stress test and scenario analysis) for the assessment of the impact of ESG risks on the financial stability of institutions in the short, medium and long term. They also mandate the EBA to elaborate on the arrangements, processes, mechanisms and strategies to be implemented by institutions to identify, assess and manage ESG risks and to assess the potential inclusion of ESG risks in the review and evaluation performed by Member State competent authorities.
The feedback received through the discussion paper will inform the EBA final report on management and supervision of ESG risks for credit institutions and investment firms. It will be also taken into account for the EBA’s ongoing work related to the fulfilment of its mandates to develop a technical standard implementing the ESG risks Pillar 3 disclosure requirements included in Part Eight of the Capital Requirements Regulation II (CRR2 – Articles 434a and 449a) and to assess whether a dedicated prudential treatment of exposures related to assets or activities associated substantially with environmental and/or social objectives would be justified as a component of Pillar 1 capital requirements (Article 501c of CRR 2), as explained in the EBA Action Plan on Sustainable Finance.
The deadline for comments on the discussion paper is 3 February 2020.