While the European Commission’s decision in March 2020 to award a contract to the American asset manager BlackRock to conduct a study on the integration of environmental, social, and governance (ESG) factors in the supervision of banks had already caused controversy (see EUROPE 12466/28), the results of the study, published on Friday 27 August, are just as controversial and have already caused civil society to react.
The 273-page study released almost 5 months after it was submitted to the European Commission, concludes that banks and regulators need to do more.
“Despite increased efforts by banks and supervisors, this study finds that the pace of implementation to achieve effective ESG integration within risk management, prudential supervision, and business strategies and investment policies needs to be accelerated”, it states.
BlackRock notes that there is, to date, no common and precise definition of ESG risks among banks. Few have developed a detailed list of ESG factors with a mapping of sectors, geographies, and customer segments in order to understand their relevance as risk factors.
To support this acceleration, the report calls for improved definitions of ESGs, assessment methodologies, and associated quantitative indicators. Among the ideas mentioned are the establishment of “common technical standards on banks’ ESG data collection requirements via regulation” or the organisation of “regular, mandatory climate stress tests for banks in order to assess vulnerabilities”.
The report also recognises that “an expanded taxonomy or taxonomy-like classification system, defining brown and grey activities, as well as considerations on the social dimension” could “increase harmonisation of disclosure of ESG activities”.
Measures to increase accountability at the management and board level of banks could also be introduced, according to BlackRock.
“All our fears were fully justified”
“All our fears were fully justified”, said a statement on Monday 30 August from Change Finance and Reclaim Finance, who believe that the report could “could seriously derail or delay efforts to align finance with Paris climate goals”.
By focusing on data, disclosure, and guidance, they believe that the report has pushed the Commission away from swift, strict, and mandatory measures.
“When you let a financial corporation with big investments in everything from coal to gas and oil, as well as in banks, propose policy measures on climate change and banking, you will end up with a light-touch approach”, said Kenneth Haar, a researcher at the Corporate Europe Observatory and member of Change Finance.
As soon as the contract was awarded to BlackRock these organisations, as well as several Members of the European Parliament, had mobilised to have the Commission’s decision annulled (see EUROPE 12510/20). The case even went as far as the European Ombudsman, who concluded that the Commission should have been “more vigilant” by checking that BlackRock was not subject to a conflict of interest, before awarding such a contract (see EUROPE 12609/26).
In the face of pressure, the European Commission nevertheless stood firm and refused to terminate its contract with BlackRock (see EUROPE 12634/26), but promised to strengthen the dialogue with civil society on this issue. It plans to hold a public debate on the report with several stakeholders.
According to the two organisations, however, this dialogue comes too late and the report should have been made public before the Commission published its new strategy on sustainable finance on 6 July (see EUROPE 12756/15).
According to Lara Cuvelier of Reclaim Finance, “BlackRock’s vague formula” has “disturbing similarities with the European Commission’s flawed strategy on sustainable finance”.
See the report written by BlackRock: https://bit.ly/3juYUfQ (Original version in French by Marion Fontana)