On 24 October 2022, the European Banking Authority (EBA) published a report, addressed to competent authorities, on how to incorporate ESG risks in the supervision of investment firms. The Report also provides an initial assessment of how ESG factors and ESG risks could be included in the supervisory assessment of investment firms.

The Report should be considered in conjunction with the EBA report on the management and supervision of ESG risks for credit institutions and investment firms (EBA/REP/2021/18) and EBA guidelines on common procedures and methodologies for the supervisory review and evaluation process under IFD (EBA/GL/2022/09).

General conclusions and policy recommendations set out in the Report include:

  • To ensure appropriate integration of ESG considerations into the supervisory framework, the EBA sees the need to embed ESG factors and risks in the scope of the supervisory review. The ESG considerations should be incorporated in the supervisory processes in a proportionate manner, taking into account the investment firm’s business model, size, internal organisation and the nature, scale, and complexity of its services and activities, as well as the materiality of its exposure to ESG risks.
  • The integration of ESG risks into supervisory review should be implemented gradually. In the short-term, competent authorities should focus on the integration of ESG risks in the investment firms’ strategy, as part of the business model analysis, and in their internal governance arrangements. In terms of risk management, competent authorities should assess how investment firms identify, assess, and manage their exposures subject to ESG risks, including any concentration in investment activities that are vulnerable to ESG risks. Subsequently, the supervisory  assessment could provide more comprehensive coverage of risks to capital and  liquidity risk, which is expected to be facilitated by the development of methodologies and access to reliable data.
  • Data and quantification methodologies are at a nascent stage and expected to develop and improve in the future. Until the available quantification methodologies reach a more mature level, the use of proxies or approximation methodologies may be beneficial to establish a dialogue with investment firms that are materially exposed to ESG risks. As part of the supervisory review, competent authorities should monitor investment firms’ efforts to put in place necessary internal infrastructure and processes to increase coverage and collection of ESG data.