On 23 June 2021, the European Banking Authority (EBA) published a report on the management and supervision of environmental, social and governance (ESG) risks.

The report has been prepared in accordance with Article 98(8) of the Capital Requirements Directive V (CRD V) and Article 35 of the Investment Firms Directive (IFD). These provisions mandate the EBA to develop a report providing uniform definitions of ESG risks, and appropriate qualitative and quantitative criteria (including stress tests and scenario analyses) 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 their potential inclusion in the review and evaluation performed by Member State competent authorities.

The report focuses on the resilience of institutions to the potential financial impact of ESG risks across different time horizons. In particular, the report outlines the impact that ESG factors, especially climate change, can have on institutions’ counterparties or invested assets, affecting financial risks. The EBA also provides recommendations for institutions to incorporate ESG risks-related considerations in strategies and objectives, governance structures, and to manage these risks as drivers of financial risks in their risk appetite and internal capital allocation process. To further enhance the supervisory review and evaluation process (SREP), the EBA also sees a need to extend the time horizon of the supervisory assessment of the resilience of institutions’ business models, applying at least a 10 year horizon to capture physical risks, relevant public policies or broader transition trends. The report proposes a phase-in approach, starting with the inclusion of climate-related and environmental factors and risks into the supervisory business model and internal governance analysis, whilst encouraging institutions and supervisors to build up data and tools to develop quantification approaches to increase the scope of the supervisory analysis to other elements.

The report has been transmitted to the European Parliament, the Council and the European Commission, which are invited to take it into consideration in the context of the Renewed Sustainable Finance Strategy and the review of CRD and Capital Requirements Regulation.

The report and its recommendations will be used by the EBA as a basis for the development of EBA guidelines on the management of ESG risks by institutions and an update of the SREP guidelines to include ESG risks in the supervision of credit institutions.