The EBA has recently initiated a consultation on proposed guidelines focused on ESG risk management in the banking sector.
According to ESG Today, these guidelines are a crucial step towards addressing risks associated with the European Union’s transition to a climate-neutral economy. The proposed framework obliges banks to conduct regular materiality assessments of ESG risks and integrate these considerations into their regular risk management frameworks.
This integration spans various risk categories such as credit, market, operational, and liquidity risks, among others, across different time horizons.
Additionally, the guidelines mandate that institutions develop transition plans under the Capital Requirement Directive (CRD) framework. These plans should address risks arising from climate transition and financial risks stemming from ESG factors and regulatory objectives.
The EBA’s approach is distinct from other sustainability-focused regulations like the Corporate Sustainability Reporting Directive (CSRD) and the proposed Corporate Sustainability Due Diligence Directive (CSDDD). The new guidelines prioritize embedding ESG risks in strategies and policies over aligning with specific sustainability goals or transition pathways.
The EBA’s proposed guidelines represent a significant advancement in sustainable finance. Launched following the EBA’s late 2022 sustainable finance roadmap, these guidelines aim to support and monitor the integration of ESG risk considerations in the banking framework.
The EBA highlighted that despite previous efforts, there have been shortcomings in including ESG risks in business strategies and risk management frameworks. These shortcomings could challenge the stability and safety of institutions as ESG risks become increasingly substantiated.
Moreover, while the guidelines don’t necessarily push institutions to exit carbon-intensive sectors, they encourage banks to proactively consider technological, business, and behavioral changes driven by the sustainable transition. This includes focusing on related risks, opportunities, transition planning, and engagement.
“Several shortcomings have been observed in the inclusion of ESG risks in business strategies and risk management frameworks,” the European Banking Authority said. These could “pose challenges to the safety and soundness of institutions as the EU transitions towards a more sustainable economy and ESG risks become increasingly substantiated or materialize.”
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