Response to consultation on draft Guidelines on the management of ESG risks
Question 1: Do you have comments on the EBA’s understanding of the plans required by Article 76(2) of the CRD, including the definition provided in paragraph 17 and the articulation of these plans with other EU requirements in particular under CSRD and the draft CSDDD?
NA
Question 2: Do you have comments on the proportionality approach taken by the EBA for these guidelines?
How applies proportionality in different contexts? How smaller institutions might demonstrate compliance or access required data?
Question 3: Do you have comments on the approach taken by the EBA regarding the consideration of, respectively, climate, environmental, and social and governance risks? Based on your experience, do you see a need for further guidance on how to handle interactions between various types of risks (e.g. climate versus biodiversity, or E versus S and/or G) from a risk management perspective? If yes, please elaborate and provide suggestions.
As for the need for further guidance on how to handle interactions between various types of risks, such as climate versus biodiversity, or E versus S and/or G, the document doesn't provide clear strategies. While institutions are advised to have robust internal procedures for addressing these risks, clearer guidelines on identifying and managing potential conflicts between different types of risks might be beneficial.
From a risk management perspective, institutions may need clearer guidance on how to handle risk interactions, and the guidelines could specify best practices or guide approaches for the same. For example, more detailed direction might be warranted on how to navigate situations where mitigation measures for one risk type might exacerbate another risk.
Question 4: Do you have comments on the materiality assessment to be performed by institutions?
NA
Question 5: Do you agree with the specification of a minimum set of exposures to be considered as materially exposed to environmental transition risk as per paragraphs 16 and 17, and with the reference to the EU taxonomy as a proxy for supporting justification of non-materiality? Do you think the guidelines should provide similar requirements for the materiality assessment of physical risks, social risks and governance risks? If yes, please elaborate and provide suggestions.
NA
Question 6: Do you have comments on the data processes that institutions should have in place with regard to ESG risks?
NA
Question 7: Do you have comments on the measurement and assessment principles?
NA
Question 8: Do you have comments on the exposure-based methodology?
NA
Question 9: Do you have comments on the portfolio alignment methodologies, including the reference to the IEA net zero scenario? Should the guidelines provide further details on the specific scenarios and/or climate portfolio alignment methodologies that institutions should use? If yes, please elaborate and provide suggestions.
NA
Question 10: Do you have comments on the ESG risks management principles?
NA
Question 11: Do you have comments on section 5.2 – consideration of ESG risks in strategies and business models?
NA
Question 12: Do you have comments on section 5.3 – consideration of ESG risks in risk appetite?
NA
Question 13: Do you have comments on section 5.4 – consideration of ESG risks in internal culture, capabilities and controls?
NA
Question 14: Do you have comments on section 5.5 – consideration of ESG risks in ICAAP and ILAAP?
NA
Question 15: Do you have comments on section 5.6 – consideration of ESG risks in credit risk policies and procedures?
NA
Question 16: Do you have comments on section 5.7 – consideration of ESG risks in policies and procedures for market, liquidity and funding, operational, reputational and concentration risks?
NA
Question 17: Do you have comments on section 5.8 – monitoring of ESG risks?
NA
Question 18: Do you have comments on the key principles set by the guidelines for plans in accordance with Article 76(2) of the CRD?
NA
Question 19: Do you have comments on section 6.2 – governance of plans required by the CRD?
NA
Question 20: Do you have comments on the metrics and targets to be used by institutions as part of the plans required by the CRD? Do you have suggestions for other alternative or additional metrics?
NA
Question 21: Do you have comments on the climate and environmental scenarios and pathways that institutions should define and select as part of the plans required by the CRD?
NA
Question 22: Do you have comments on section 6.5 – transition planning?
To make it easier for institutions to implement these guidelines, further details or clarification could potentially be provided for certain aspects. These might include concrete examples of suitable targets, more explicit guidance on how to conduct regular reviews, or more details on how to assess the implications of transition planning on the business and risk profile.
In addition, providing a common format or template for creating transition plans, as mentioned in question 24 in the excerpts, could potentially simplify the process of planning and ensure uniformity. For such a template, key aspects to consider could include the necessary elements of transition plans, the alignment of these elements with other regulatory requirements, as well as ensuring sufficient flexibility for institutions to cater the plan to their specific context.
Question 23: Do you think the guidelines have the right level of granularity for the plans required by the CRD? In particular, do you think the guidelines should provide more detailed requirements?
According to the information present in the document, it appears that the drafted guidelines present a reasonably structured and detailed framework for implementing plans required by the CRD (Capital Requirements Directive). They articulate the necessity for institutions to have detailed transition plans to address risks arising from the transition and adjustment process towards regulatory objectives related to ESG factors.
Nonetheless, given the diverse nature of financial institutions and the varying degrees of ESG risk exposure, there could be scope for further detailing in these guidelines. More explicit guidance might be needed in certain areas such as setting targets, governance of plans, and mechanisms to monitor and review plans regularly.
Furthermore, these guidelines could potentially benefit from providing more specific details about the interaction and consistency between CRD plans and other EU requirements, particularly under CSRD (Corporate Sustainability Reporting Directive) and the draft CSDDD (Corporate Sustainability Due Diligence Directive). This would help ensure complementarity and avoid duplication between different regulatory requirements.
In summary, while the guidelines deliver a comprehensive high-level approach, they might benefit from more granularity and detail in some aspects. It's also essential to keep in mind that further granularity needs a careful balance to maintain flexibility for institutions in implementing these guidelines according to their specific circumstances.
Question 24: Do you think the guidelines should provide a common format for the plans required by the CRD? What structure and tool, e.g. template, outline, or other, should be considered for such common format? What key aspects should be considered to ensure interoperability with other (e.g. CSRD) requirements?
The provision of a common format such as a template or outline for the plans required by the CRD could be beneficial in promoting consistency and uniformity across institutions. It could also aid in facilitating the assessment and evaluation of these plans by relevant authorities. However, the structure should also allow flexibility to cater to the varying nature, size, and complexity of different institutions.
Key aspects to consider when designing such a common format might include:
1. Comprehensive Coverage: The structure should ensure that all necessary and relevant aspects are covered in the plans. This could include the institution's risk profile, identified ESG risks, materiality assessments, risk mitigation strategies, specific indicators or targets, governance structures, among other elements. The template should also account for different timeframes i.e., short, medium, and long-term.
2. Reference Benchmarks: The template could provide reference benchmarks or standards for certain elements where applicable, such as key indicators or risk thresholds.
3. Flexibility: While providing a common format, the structure should still allow individual institutions to adapt it to their specific contexts and needs. It should not constrain institutions' creativity or autonomy in developing their own methodologies or approaches where suitable.
4. Consistency: The common format should be designed in a way that promotes consistency with other relevant EU requirements (such as the CSRD and the CSDDD). It should support the interoperability of these regulations to avoid duplicate work and promote a streamlined procedure for institutions.
These suggestions aim to strike a balance between providing a structured approach that ensures uniformity, while also accommodating diversity and promoting adaptability across different institutions.
Question 25: Where applicable and if not covered in your previous answers, please describe the main challenges you identify for the implementation of these guidelines, and what changes or clarifications would help you to implement them.
The implementation of these ESG risk management guidelines might present some challenges as discussed below:
1. Data Availability and Quality: As outlined in the guidelines, data to assess exposure to certain ESG risk factors might not be available, especially for smaller corporate counterparties. It might be challenging retrieving specific data points and qualitative metrics.
2. Risk Methodology Complexity: The guidelines propose a combination of methodologies, including exposure-based, portfolio-based, and scenario-based, to measure ESG risks. Implementing and integrating these approaches might pose challenges due to their complexity and the level of expertise required.
3. Predicting Future Risks: Tracking dynamically changing ESG risks, estimating how environmental factors will evolve, and predicting future changes could be challenging given the various uncertainties associated with them.
4. Adaptation of Institutions: Different institutions have varying capacities and resources. The process of adaptation to robust ESG risk management could be a significant challenge for many institutions. To mitigate these challenges, the guidelines could provide:
1. More specific guidance on managing data gaps or availability issues related to ESG risk assessment.
2. Additional resources, like tools or frameworks, particularly for the complex methodologies suggested for ESG risk assessment.
3. More explicit guidance on predicting and preparing for future ESG risks, including potential changes in technology, regulations, or industry practices.
4. Consideration for tailoring guidelines to better fit institutions of various sizes and capacities to reduce the burden of adaptation.
5. Clearer guidelines on interoperability with other relevant EU requirements, perhaps through additional clarifications or examples.
6. Provisions for training and capacity building, especially for smaller institutions who may lack the resources or capabilities to implement effective ESG risk management.
7. Potential development of a common template or structure for plans required by the CRD, ensuring that it's flexible enough for different institutions but also standardized enough for efficient implementation and comparison.