European Banking Authority issues guidance on ESG risks

The European Banking Authority (EBA) has issued new guidance for financial institutions to bolster plans for ESG-related risks.

The regulator released its Report on Environmental, Social and Governance (ESG) risks management and supervision, which will be a major tool for its ongoing ESG work. The document outlines how ESG factors and risks should be included in the regulatory and supervisory framework for credit institutions and investment firms.

One of the focuses of the report is the resilience of institutions following financial impact of ESG risks in different time horizons. It suggests these assessments should have a comprehensive and forward-looking view, as well as early, proactive actions.

In its report, the EBA explains the impact ESG factors, such as climate change, can have on institutions’ counterparties or invested assets, affecting financial risks. Additionally, it identifies available indicators, metrics and evaluation methods required to make effective ESG risk management.

Furthermore, the report provides recommendations for institutions to incorporate ESG risks-related considerations in strategies and objectives, governance structures. It also suggests firms manage these risks as drivers of financial risks in their risk appetite and internal capital allocation process. Institutions should also develop methods and approaches to test long-term resilience.

The EBA has made the proposal for a phase-in approach, which will enhance the supervisory review and evaluation. The phase-in approach will begin with the inclusion of climate-related and environmental factors and risks into the supervisory business model and internal governance analysis. It will also encourage companies to establish data and tools for quantification approaches to increase the scope of the supervisory analysis to other elements.

Earlier in the week, Japan’s Financial Services Agency issued recommendations on how to promote sustainable finance in the country. The regulator has an expert panel to explore how financial institutions can invest into Japanese firms that support the carbon-neutral transition.

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