On 3 May 2022, the European Banking Authority (EBA) issued a Discussion Paper on the role of environmental risks in the prudential framework for credit institutions and investment firms. The Discussion Paper initiates the discussion on the appropriateness of the current EU prudential framework to address environmental risk drivers and considers the potential justification for a dedicated prudential treatment of exposures substantially associated with environmental and/or social objectives and those subject to environmental and/or social impacts. The Discussion Paper has been issued by the EBA in relation to the mandates contained in Article 501c of the Capital Requirements Regulation and Article 34 of the Investment Firms Regulation.
The Discussion Paper provides an overview of the existing elements of the prudential framework and how they interact with environmental risks. The analysis takes a risk-based approach to ensure that prudential requirements reflect underlying risks and ultimately support institutions’ resilience to such risks. Its starting point is that prudential requirements should reflect the risk profiles of exposures and should not be used for other policy purposes. The Discussion Paper therefore seeks evidence on whether environmental characteristics of exposures correlate with the level of risk, and in particular with the credit quality of exposures. The Discussion Paper also notes that while there is potential for the existing framework to capture environmental risks, the way in which such risks translate into financial risks over time remains an area of significant uncertainty. In particular, fundamental questions remain as to whether risks to the overall system are likely to grow due to increased environmental risks or if it is more likely that environmental risks imply the need for a reassessment of the risk profiles of firms and sectors in a way that is predominantly neutral to the overall capital requirements.
The deadline for responding to the Discussion Paper is 2 August 2022. A public hearing will take place virtually in the form of a webinar on 17 June 2022.