Response to discussion Paper on management and supervision of ESG risks for credit institutions and investment firms (EBA/DP/2020/03)
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We would therefore welcome the EBA offering and promoting clarity around these issues. As the exercise is very complex and embeds many uncertainties, we believe that this new area of analysis of the assessment of the long term resilience of credit institutions in accordance with relevant public policies should be carried out on a very modest ‘test and learn’ approach.
Furthermore, there are already generic provisions in place which require credit institutions to take into account all material risks and, accordingly, we believe these provisions would technically cover ESG risks.
Finally, regarding the assessment of ESG factors impacts to liquidity and funding, the current analysis is less mature than for the other risks. Given that analysis in this area is less mature, we think incorporation of ESG risks considerations in the assessment of risks to capital, liquidity and funding should not be addressed at this stage and any decision should be deferred at least until the analysis of ESG risks has evolved further.
22. Please provide your views on the incorporation of ESG factors and ESG risks considerations in the business model analysis of credit institutions.
Credit institutions already incorporate ESG factors (considered as drivers of existing credit, market and operational risks) and ESG risks (defined as credit/market/operational risk events triggered or aggravated by ESG factors) considerations into their business model analysis when making investment decisions, for example when undertaking credit appraisals, and ensure these risks are priced accordingly. Their due diligence processes allow credit institutions to take a long-term view on how potential borrowers are responding to ESG factors and the strategic measures they are putting in place. Furthermore, credit institutions will also take into account other impacts, such as consumer views on climate change and how this may impact appetite going forward.23. Do you agree with the need to extend the time horizon of the supervisory assessment of the business model and introduce as a new area of analysis the assessment of the long term resilience of credit institutions in accordance with relevant public policies? Please explain why.
At present, the supervisory assessment toolbox does not specifically identify and address long-term ESG risks, such as those associated with climate change. However, this does not mean that credit institutions are failing to factor these in internally. That said, a lack of data and methodologies for quantifying long-term ESG risks, a lack of a risk-oriented taxonomy or common definition of ESG assets and, as a result, a lack of evidence of a risk differential between ESG assets, all significantly impede the ability of credit institutions to extend the time horizon of the assessment of the business model.We would therefore welcome the EBA offering and promoting clarity around these issues. As the exercise is very complex and embeds many uncertainties, we believe that this new area of analysis of the assessment of the long term resilience of credit institutions in accordance with relevant public policies should be carried out on a very modest ‘test and learn’ approach.
24. Please provide your views on the incorporation of ESG risks considerations into the assessment of the credit institution’s internal governance and wide controls.
Credit institutions have, in the main, already taken steps to incorporate ESG factors and risks into their internal governance framework, as required of them by their stakeholders. Shareholders and employees are very active in driving the ESG agenda and would expect to see ESG risk-specific considerations included in a credit institution's overall internal governance framework, the functioning of its management body, corporate and risk culture, remuneration policies and practices, internal control framework, risk management framework and information systems. We would therefore welcome the EBA's strategy to exercise proportionality in this area, as the market is driving credit institutions, and corporates more broadly, to take ESG risks into account when producing their internal governance and wider control frameworks.25. Please provide your views on the incorporation of ESG risks considerations in the assessment of risks to capital, liquidity and funding.
The current macroprudential policy toolbox does not specifically identify and address the incorporation of ESG risks. However, as mentioned above, we strongly believe it's too early for imposing capital requirements, due to lack of data and methodologies for quantifying risks and calibrating prudential requirements, a lack of a risk-oriented taxonomy or common definition of ESG risks and, as a result, a lack of evidence of a risk differential between ESG assets and other types of assets. Also, at inception, the inclusion of these factors in the Supervisory Review and Evaluation Process (SREP) should primarily focus on qualitative aspects rather than quantitative ones, starting first with environmental factors. In addition, it should be done in proportion to the financial risk that the ESG topics represent for an institution.Furthermore, there are already generic provisions in place which require credit institutions to take into account all material risks and, accordingly, we believe these provisions would technically cover ESG risks.
Finally, regarding the assessment of ESG factors impacts to liquidity and funding, the current analysis is less mature than for the other risks. Given that analysis in this area is less mature, we think incorporation of ESG risks considerations in the assessment of risks to capital, liquidity and funding should not be addressed at this stage and any decision should be deferred at least until the analysis of ESG risks has evolved further.