The European Banking Authority (EBA) sets out a series of recommendations on how banks and investment firms should manage environmental, social and governance (ESG) risks and how supervisors should integrate these risks into their supervisory review activities in a report published on Wednesday 23 June.
The European Banking Authority (EBA) sees a need to enhance, in a risk-based and proportionate manner, incorporating ESG risks into financial institutions’ business strategies, internal governance arrangements and risk management frameworks.
In particular, banks are encouraged to extend their strategic planning horizon to ten years and should start publishing their strategic ESG risk objectives, including performance indicators based on their financial risk appetite.
Regarding risk management, the EBA notes the existence of three different methodological approaches (‘portfolio alignment method’, ‘risk framework method’ and ‘exposure method’). It has not adopted a position favouring one of them, seeing merit in combined use of these methods.
Supervision. The EBA stresses the need to integrate ESG risks, primarily climate risk, into supervisory activities. The existing SREP supervisory process should be enriched with an assessment of how banks test the resilience of their business model to environmental, social and governance factors.
The European authority also recommends that supervisors consider risks related to environmental factors as factors influencing the risks to a bank’s own funds, liquidity, and funding.
However, no recommendation is made at this stage to include the consideration of ESG risks in the supervision of investment companies.
The EBA will develop guidance based on this report.
Read the EBA report: https://bit.ly/3qrkKCD (Original version in French by Mathieu Bion)