The European Banking Authority (EBA), the primary bank regulator of the EU, has unveiled a new report.
According to ESG Today, this report discusses the importance and increasing prominence of environmental and social risks in the prudential supervision framework applicable to banks and investment firms.
EBA anticipates these ESG risks will become more significant in the future, influencing the risk profiles of banks. These risks span financial categories, like credit, market, and operational risks, which might impact individual institutions and even the broader financial system’s stability.
The EBA’s report provides a list of short-term measures to be adopted in the next three years. These involve:
- Including environmental risks in stress test exercises.
- Encouraging credit rating agencies to consider environmental and social aspects in external credit appraisals.
- Incorporating these factors in the due diligence process and in the valuation of immovable property as collateral.
- Recommending financial entities to determine if environmental and social elements lead to operational risk losses.
- Crafting environmental-related concentration risk metrics for supervisory reports.
From a long-term perspective, the EBA highlights potential alterations to the Pillar 1 framework, acknowledging the increasing significance of ESG risks. It suggests the exploration of scenario analyses to improve the prudential framework’s future-oriented elements and the role of transition plans in the advancement of risk-based improvements to the Pillar 1 framework.
The report also looks into revising the internal ratings-based supervisory formula and the conventional approach for credit risk to better mirror environmental risks. Additionally, it proposes introducing environmental-centric risk metrics under the Pillar 1 framework.
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