11 February 2021

Management and supervision of ESG risks for credit institutions and investment firms: EBF response to EBA consultation

The European Banking Federation has responded to the European Banking Authority’s consultation on incorporating ESG risks into the governance, risk management and supervision of credit institutions and investment firms.

Key message

• The financial impact of the climate on the bank’s counterparties and the financial impact of the counterparties on climate could impact the risk position of the bank itself. Banks are therefore increasingly active in the assessment of ESG factors as drivers for existing risk categories. However, risks related to ESG factors are still difficult to quantify. The time horizon of ESG impacts is longer than the regular time horizon for strategic planning, the prudential timeframe and the supervisory time horizon. There are too many uncertainties about the actual effects and also methodological challenges to integrating these risk divers in the risk management framework and models.
• Lack of data is also a challenge. The recent legislative developments will only accelerate the provision of data on green assets but will not improve data on non-green assets that are much needed for the development of quantitative indicators and methodologies. Most of the listed indicators are not necessarily suitable for risk management and are difficult to be evaluated and applied. Some could be useful for categorization of sustainable finance product offering but such categorization is per se not linked to risk management.
• In the short-term horizon, the focus should therefore be on the correct assessment of risks. In the medium/long-term horizon (3 to 10 years), the focus should be on consistency in approaches, ensuring that strategy of institutions was built considering ESG factors and expected ESG trends in a qualitative manner.
• Scenario analysis could be a useful tool to feed thought around business strategy, but their results should be used with caution.  The outcomes should for the time being primarily focus on ESG-related KPIs, and secondarily on specific financial indicators, in order to focus on the assessment of ESG risk drivers on the business model.  They should remain clearly differentiated from solvency-related stress testing exercises, which use different methodologies, pursue different objectives, and therefore measure different impacts, based on different indicators. Scenario analysis and stress testing should only be used qualitatively and not for capital adequacy or allocation as they cannot be considered a  tool for proper measurement of banks resilience, given the current uncertainty around methodologies and data.

Find the EBF response to this consultation by clicking the ‘full document’ button below:
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FOR MORE INFORMATION:
Sustainable Finance page on the EBF website: CLICK HERE

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