The European Banking Authority (EBA) has released a report on the integration of ESG risks for the purposes of the prudential supervision of investment firms.
According to the EBA, the objective of the report is to set the foundations for further considerations of the ESG aspects in the supervisory review and evaluation process of investment firms.
This report builds on and complements the EBA report on management and supervision of ESG risks for credit institutions and investment firms published in June 2021.
The Authority said the report also provides an initial assessment of how ESG factors and risks could be included in the supervisory assessment of investment firms.
Proportionality is a key element of the report, which highlights the need to embed ESG considerations in a proportionate manner where the ESG factors and risks could affect the risk profile of the investment firm.
This integration, the EBA claims, should be carried out taking into account not only an investment firm’s business model, size, internal organisation and the nature, scale, and complexity of its services and activities but also the materiality of its exposure to ESG risks.
The EBA recommends that the integration of ESG aspects in the supervisory process could follow a gradual approach, prioritising the recognition of ESG risks in investment firms’ strategies, governance arrangements and internal processes, and later incorporating them in the assessments of risks to capital and liquidity.
However, competent authorities are also expected to monitor and encourage further developments in the data and methodologies allowing more accurate measurement and management of ESG risks by investment firms.
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