Discussion paper on management and supervision of ESG risks

European Banking Authority (EBA)

In 2015 the EU adopted as a commitment the binding target of reducing greenhouse gas emissions by at least 40% by 2030, compared to 1990. In addition, the EU presented in 2019 the European green deal which included the objective that Europe would become climate neutral by 2050. In addition, the financial sector is expected to play a key role in financing the transition to a sustainable economy, which is why CRDV and the Investment Services Firms Directive (IFD) contain a mandate to the EBA to produce a report providing uniform definitions of Environmental, Social and Governance risks (ESG), as well as appropriate qualitative and quantitative criteria (including stress tests and scenario analysis) for the assessment of the impact of ESG risks on the financial stability of institutions in the short, medium and long term.
 


Discussion paper on management and supervision of ESG risks

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In this regard, in November 2020, the EBA published the Discussion Paper on ESG risks management and supervision aiming to collect feedback for the preparation of its final report on the topic. This paper provides a comprehensive proposal on how ESG factors and risks could be included in the regulatory and supervisory framework for credit institutions and investment firms.

Executive summary
The EBA published in November 2020 the Consultation Paper on the Management and Supervision of ESG Risks which provides details on the risks arising from ESG factors, their management and transmission channels. The document also contains a list of quantitative and qualitative indicators, metrics and risk assessment methods.

Scope of application
This Consultation Paper can be applied to investment firms that are similar to banks in terms of their business model and risk profile and that are covered by the CRR and the CRD.

Main content
This Technical Note is structured in four key aspects:

  • Definitions: Relating to ESG factors, ESG risks and transmission channels relating to physical, transition and liability risks.
  • Quantitative and qualitative indicators, metrics and methodologies for assessing ESG risks: These are a set of tools and methodologies for assessing, estimating and incorporating ESG risks (Portfolio alignment, risk framework approach, exposure approach).
  • ESG risk management: This is the management of strategy and business processes, internal governance, risk management and specific considerations in investment firms.
  • ESG factors and risks in supervision: This involves extending the time horizon in the evaluation of supervision (through scenario analysis / stress tests).

In addition, this document reflects the initiatives underway and the progress made in the field of climate change in recent years.

Download the technical note by clicking here (also available in spanish).