Management and supervision of ESG risks for credit institutions and investment firms: EBF response to EBA consultation
11 February 2021
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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