The European Banking Authority (EBA) has launched a consultation on new proposed guidelines that aim to help banks identify, measure, manage and monitor environment, social and governance (ESG) risks.
Under the guidelines, banks would have to undertake regular materiality assessments of ESG risks and ensure they can be identified through data processes and methodologies including exposure-based, portfolio-based and scenario-based approaches.
In addition, they would need to integrate ESG risks into their regular risk management frameworks.
Considerations of impact should be across risk categories including credit, market, operational, reputational, liquidity, business model, and concentration on a short, medium and long-term time basis.
The guidelines would also require institutions to develop Capital Requirement Directive-based (CRD) transition plans. This means addressing risks arising from the climate transition and financial risks stemming from ESG factors and regulatory objectives.
According to the EBA, the new guidelines were developed in line with the regulator’s roadmap on sustainable finance.
Launched in late 2022, it sets out the EBA’s priorities and plans in the areas of sustainable finance and in supporting and monitoring the integration of ESG risk considerations in the banking framework.
Key objectives include risk management and supervision, treatment of exposures, and ESG risk and sustainable finance monitoring.
The EBA noted that despite actions taken over the past few years to manage the impacts of ESG factors, “several shortcomings have been observed in the inclusion of ESG risks in business strategies and risk management frameworks.”
The regulator added that this could “pose challenges to the safety and soundness of institutions as the EU transitions towards a more sustainable economy and ESG risks become increasingly substantiated or materialise.”
The guidelines also note a different approach relative to other sustainability-focused regulation such as the Corporate Sustainability Reporting Directive (CSRD) and the proposed Corporate Sustainability Due Diligence Directive (CSDDD).
They focus on the compatibility of business models with the EU’s climate and sustainability objectives, while the EBA’s proposals ensureESG risks are assessed and embedded in strategies and policies, rather than requiring banks to align with specific sustainability goals or transition pathways.
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