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?

ESBG wishes to stress that Article 76(2) CRD provides that Member States may  decide to exempt SNCIs from the requirement to prepare prudential transition plans.  This waiver option for SNCIs should also be considered in the EBA guidelines. Under no circumstances should SNCIs be required to submit and maintain transition plans in accordance with the EBA guidelines if the national implementation of CRD VI does not provide for this.

To ensure consistency with CSRD and CSDDD, the addressees of this guideline should also be consistent with those of CSRD and CSDDD (especially). This clarification is necessary to avoid confusion and overlapping reporting requirements.   In this regard, ESBG would like the confirmation that, if no guidance is provided, it is assumed that some discretion is left to banks. Indeed, it is paramount to implement proportionality to avoid overburdening smaller banks by being too prescriptive. Ideally, ESBG would like to call for one unified and consistent plan between these different legislations. Additionally, due to the transitional period until CSRD and CSDDD requirements come into force for different institutions, the guidelines should include a consistent transitional scenario that allows institutions to use qualitative tools instead of quantitative tools. 

Question 2: Do you have comments on the proportionality approach taken by the EBA for these guidelines?

ESBG stresses that proportionality is an important principle that should be applied throughout the guideline. It is not enough to mention it only under 'Background and rationale' (section 3.4) for general application. Therefore, ESBG suggests adding a paragraph on the application of the proportionality principle in Chapter 2 'Subject matter, scope and definitions'. 

As discussed during the hearing on 28th February, proportionality should not be based solely on the frequency of meeting requirements. Since the processes involved need to be implemented, a lower frequency may not be an appropriate relief. Therefore, a proportional design of the requirements should include fewer methods and allow for qualitative procedures. The specific situation of the respective institution, such as size, complexity, and risk content, should always be the decisive factor. Additionally, large institutions should be granted flexibility in implementation based on their individual risk profile.

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.

The EBA has emphasised the challenges of ESG risks, particularly climate and environmental risks, which include time horizon, uncertainty, and lack of historical data. Point 4 (background and rationale) acknowledges that institutions are still in the early stages of developing methods that generate management relevance. It is important to note that much is still a 'work in progress'. Despite this, the level of detailed requirements in the guidelines is surprising. We also see systemic risk as a concern, particularly when banks manage risks and make decisions based on the same indicators. The principle of methodological freedom in Pillar II, especially in dynamic areas such as ESG risks, is a valuable asset. However, we also acknowledge the corresponding requirements in CRD VI, which the EBA must operate within. In our opinion, the EBA should be very careful with the design of the guidelines. Mandatory requirements should only indicate the minimum standard, while suggestions that go beyond this can still be used as recommendations for good practice. Some points in the draft are unclear whether  they are meant as binding expectations or a recommendation. The guidelines should be clarified in this regard.

In many cases, CRD 6's ESG requirements focus indiscriminately on climate/environmental, social, and governance risks. However, climate and environmental risks differ significantly from social and governance risks. This is because climate and environmental risks have a medium and long-term impact, unlike social and governance risks which may have a more immediate impact. However, it is important to note that environmental and climate risks are more systemic in nature, while social and governance risks are primarily idiosyncratic. Therefore, it is crucial to treat these risks differently rather than equating them during the implementation process.

The principle of double materiality is a recognised and established system for sustainability reporting. However, it cannot be applied to risk management without further consideration, as the focus here is on risk management from the institution's perspective and not on the environmental  impact of business activities. The clarification in para. 26 is welcomed, as it confirms that the inside-out perspective is only used for risk management purposes to the extent that financial risks actually arise from it. To us, this should be added to the guidelines.

Question 4: Do you have comments on the materiality assessment to be performed by institutions?

The risk inventory should analyse ESG risks for three proposed time periods. Overall, ESBG is of the view that prescribing a separate materiality assessment process for ESG may be counter productive with regard to the objective of integrating ESG risks into existing processes. A separate ESG materiality assesment could therefore likely lead to increased operational complexity. A more attractive approach would be to emphasize the   integration of ESG risks in existing risk identification and measurement procedures (cf. sections 4.2 Identification and measurement, and 5.5 ICAAP and ILAAP).  This approach would also be in line with the ECB’s supervisory expectations relating to risk management and disclosure .  That being said, some flexibility can be implemented as well. For instance, it may be appropriate to distinguish between time periods for climate and environmental risks. However, this may not be necessary for social and governance risks. Then, the analysis of ESG materiality in the medium and long term could be restricted to climate and environmental risks.

We appreciate the emphasis on material activities, services, and products in para. 14 (b), which aligns with the materiality principle. We assume that 'activities' also encompasses portfolios/exposures, but seek clarification.  In general, qualitative assessments and risk management methods should be allowed for ESG risks, particularly when adequate data and/or reliable quantitative methods are not (yet) available.

We believe that analysing the 'most critical counterparties' based on their deviation from their jurisdictions' transition plans (para. 14 c) is too broad for a bank-wide materiality analysis at the portfolio level. This requirement could be deleted in our view. 

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.

As a general remark, ESBG would like to insist that defining the scope as a minimum requirement is too broad. “At least” shall be deleted and  financial institutions shall define materiality criteria in accordance with portfolio characteristics and business model.

We strongly disagree with the requirement in para. 16 to automatically classify certain industries as materially exposed to environmental risks unless proven otherwise.  The relevant NACE codes cover the entire economy sectors, which are currently undergoing a transition. There is also a lack of differentiation at NACE code level 1. For instance, the energy sector is classified as material without distinguishing between fossil fuels and renewable energy sources. Although the economy is undergoing significant transformation, we do not consider it appropriate to categorise all respective industries as material.

A sectoral approach is therefore not fully appropriate. Sectors are affected very differently. Even within sub-sectors, the impact of ESG (climate risks) for an individual (corporate) client depends on individual factors (e.g. affectedness, transition path, financial capabilities). Therefore, institutions should be allowed to use more specific approaches if they have such tools. In addition, a materiality categorisation can be applied e.g. per risk type and only when certain quantitative/qualitative materiality thresholds are reached. Furthermore, the categorisation of certain sectors as material does not automatically mean that they are material from an institution's perspective. Materiality for institutions depends, among other things, on the business model, risk, concentrations, etc. The same reasoning also applies to social and governance risks.

The reference to the EU taxonomy in para. 17 is unclear. The taxonomy was not designed as a risk tool and cannot make statements about the risk content of exposures. Therefore, it is not a suitable distinguishing feature for this question, as a bank's transition risk may not align with the EU taxonomy. For instance, a company classified as 'green' under the taxonomy may face significant transition risks, such as a lack of financing options for necessary investments.

Therefore, para. 16 and 17 should be removed, and the approach to materiality assessment should be left to the discretion of the institutions.

Question 6: Do you have comments on the data processes that institutions should have in place with regard to ESG risks?

ESBG appreciates the EBA's strategy of prioritising (publicly) available data and concentrating on customers who are subject to reporting requirements. The data requirements should align with the data to be disclosed under CSRD. As per the EBA Guidelines on Loan Origination and Monitoring para. 126, institutions may conduct portfolio-based evaluations for micro/small enterprises instead of borrower-specific assessments. This regulation is sensible as it reduces the burden on micro and small enterprises. Institutions can also obtain relevant management information with industry values. Para. 24 should include the possibility of using sector data. 

That being said, in ESBG members’ experience, there is  still a lack of ESG-data. Where counterparties do provide such data, comparisons and risk model design is complicated as a result of the lack of a uniform reporting standard. For these reasons, the data to be collected from counterparties which is listed in para. 23 should be seen as a recommendation and not a list of minimum requirements. In case the approach of a minimum requirement list is kept, data collection in retail banking should be limited to data on climate related factors (such as greenhouse gas emissions and energy efficiency). Institutions must be able to efficiently organize data processes, focusing on the relevance of business activities in relation to all risk types and the results of the materiality assessment. We request an additional point to be added to para. 21. Furthermore, we suggest explicitly including the use of external data providers, not limited to public bodies but also professional data agencies. It is important to strike a balance between adequacy and practicability in the overall data processes. The data collection should reflect that in retail banking, generally less information is available than in corporate banking.  

In para.23 a), several metrics are mentioned that are based on the materiality of the impact of CSRD, resulting in a regulatory focus. Moreover, “key assets” shall mean assets economically material for the banks’ client or financed asset (in case of a ring-fenced structure) according to the client’s assessment. Still in this paragraph, reference to large corporate clients according to Directive 2013/34/EU shall be updated to CSRD 2022/2464/EU. The list of data which have to be collected should only be valid if those topics (E, S and G) are material according CSRD materiality assessment of relevant client. Hence, this list shall only be demonstrative and not “at least” as the current wording. It is suggested that financial materiality alone should be decisive, particularly for SNCI, with a focus on points i. and iv. It is recommended that an opening clause be included to allow LSIs or SNCIs to choose the metrics, with para. 23 a) being used only as an example.  It may be worth considering that SNCIs could be excluded from para. 23 b) and instead use the exposure-based approach outlined in para. 27. Additionally, an exception to para. 29 could be made specifically for SNCIs. When it comes to the CSDDD, the usability of draft guidelines would increase if the guidelines clarifiy how the data collection requirements relate to the due diligence requirements laid down in the direct (as these latter requirements only have limited application for financial institutions).

Question 7: Do you have comments on the measurement and assessment principles?

It may be worth considering whether the use of three risk measurement methods is necessary for smaller institutions, as the exposure-based approach should be sufficient in most cases. With regard to para. 31 c), it may be beneficial to explore the possibility of its removal. Additionally, we kindly request clarification on para. 27 and suggest the inclusion of proportionality aspects. Indeed, it would be advisable for the measurement and valuation approaches to align with the bank's specific portfolio, taking into account the scope and complexity of the procedures. The requirement to combine different methods (para. 27) may be challenging, particularly for smaller and less complex institutions, in consideration of the proportionality principle. Smaller institutions, in particular, may benefit from greater flexibility in selecting methods. 

It may not be practical to allocate risks to individual risk drivers, as they are generally interdependent and not easily distinguishable. It is worth considering that allocating resources in this way may require a significant amount of effort and increase complexity. However, it may not provide any additional benefits for risk management practices, as stated in para. 26b.

As for para. 28:  ESBG believes it is unrealistic to require/expect banks to quantify the probabilities and consequences of environmental risks. As pointed out in the draft guidelines, these are risks that lie ahead of us and where one lacks data, hence quantification of the probabilities and consequences will be "guesstimates" at best. At this point, the guidelines should formulate realistic expectations for precision and quality in risk quantification based on these premises.

Question 8: Do you have comments on the exposure-based methodology?

It is often challenging to integrate ESG aspects into PD modelling due to the current unavailability of data and the potential technical unsoundness, particularly when considering the long-term impact of E-factors. As a result, it is assumed that banks are not obligated to incorporate ESG risks into their rating models, provided that an existing ESG score covers all E, S, and G components and is used as a decision criterion during the lending process. It would be appreciated if further clarification could be provided. 

The formulation of data requirements for analysing risk factors by the EBA should be such that they can be met with the data disclosed by companies in accordance with other requirements, such as CSRD or VSME. Imposing additional requirements would be inconsistent. 

With regard to para. 31, the following comments are provided: 

• The list of risk factors and the wording '...at least...' may not be optimal for specific portfolios or exposures, as it represents a minimum requirement regardless of portfolio materiality. Therefore, the suitability of the list for all exposures is not guaranteed, and the application of the factors should depend on the specifics of the portfolio and the size of the institution. 
• With regard to points a and b, we kindly request clarification on the intended meaning of 'degree of vulnerability'.   
• Point a): “key assets” shall mean assets economically material for the banks’ client or financed asset (in case of a ring-fenced structure) according to the client’s assessment.
• The 'Look through' extension from the customer to the guarantor cannot be managed in any case.  Therefore, we will not make the ESG assessment for the guarantor as we consider it counterproductive.
• Risk mitigation aspects should be carefully considered, particularly for  transition risks. The willingness and ability of customers to adapt should be taken into account. The objective is to involve a wide range of customers in the transformation and provide them with financing support. It is important to consider these aspects in order to avoid excluding customers who may wish to transition from financing.
• Point c): Currently there are no market standards or science based initiatives which provide such reliable impact assessment of biodiversity loss, water stress or pollution. 

With regard to para. 32, we would like to draw attention to the simplifications for micro and small enterprises in the EBA GL LOaM, which we previously commented on in question 6.  ESBG kindly requests   to allow for portfolio-based valuations for micro/small enterprises here as well. 

ESBG would like to suggest that the time horizon for S+G risks should be limited to the short term. While a long-term perspective may be suitable for environmental and climate risks, it may not be necessary for S and G risks. 

Moreover, it may be advisable to clarify in para. 33 that the responsibility to carry out due diligence procedures with borrowers/exposures is limited to borrowers for whom such procedures are considered essential and suitable in the context of the business relationship

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.

ESBG would like the addition of a note highlighting the high degree of uncertainty associated with climate risk modelling.  With regard to para. 36 ESBG calls for discretion to be left to  financial institutions.

Furthermore, the text makes reference to large institutions whose securities are traded on regulated markets. Could you kindly provide clarification on whether this pertains to equities or debt securities?  Instead of referencing the IEA scenarios, may we suggest using the NGFS scenarios as they provide relevant parameters and key figures for risk management analyses. We kindly request that these scenarios be explicitly named as permissible.

ESBG would appreciate an explanation regarding the meaning of 'representative samples of exposures'.    In order to facilitate adequate support for SNCIs, it may be beneficial to have a clear means of identifying 'representative samples of exposures' to streamline the process of demonstrating representativeness. It is suggested that para. 38 could benefit from further clarification regarding the definition of the large institutions mentioned. This could be achieved by following the example set in para. 36, which clarifies that these institutions have shares traded on regulated markets.

Additionally, ESBG would recommend that the reference to the UN Sustainable Development Goals (SDG) in para. 38 be removed.  From a risk perspective, it may be unclear why the positive impact regarding the UN SDGs should be raised, as this does not appear to result in a financial risk. 

• The EU and member states utilize the SDGs as a framework for setting political goals in legislation. Therefore, alignment analyses implicitly cover the SDGs. 
• It is our understanding that the CSRD sufficiently addresses how companies position themselves in relation to the SDGs and that this is not a risk management issue.

Finally, a provided specification should be fully in line with the available scenarios from International Energy Agency (IEA) and connected Decarbonization methodologies and tools (e.g., PACTA and SBTi). Currently regulatory reporting requests are deviating in terms of specification. A harmonized approach would be requested. A proposal could be: Scope 3 only if material for the industry:

•         Electricity Production (D35.11) 

•         Heat Production (D35.30) 

•         Auto Manufacturing (C29.10) 

•         Steel & Iron (C24.10) 

•         Cement Production (C23.51) 

•         Oil & Gas Upstream (B06.10, B06.20)

Question 10: Do you have comments on the ESG risks management principles?

First, ESBG believes that minimum standards can be useful for ESG risk management, especially for environmental and social issues subject to international conventions, regulations, or best practices. However, the use of minimum standards should not be seen as a one-size-fits-all solution for ESG risk management, and institutions should also consider the specific context and circumstances of each exposure. The use of minimum standards should not lead to an exclusionary or punitive approach towards counterparties that do not meet the minimum standards but rather a constructive and supportive approach that encourages improvement and progress on ESG issues.

Then, it is our understanding that the intention behind specifying a longer-term time horizon of at least 10 years is not to calculate multi-year risk-bearing capacity within the economic ICAAP perspective. Institutions incorporate ESG factors in the normative and economic perspective in the ICAAP, utilizing the risk assessment horizons that have been applied so far. Could you kindly provide further clarification on this matter?

We have found the requirements outlined in para. 42 to be somewhat restrictive. Institutions are encouraged to exercise their discretion in selecting appropriate measures to assess and manage risks. The EBA acknowledges that 'bearing a risk' may not be a viable option for all institutions. It is worth noting that regionally anchored institutions or those with sector specialisations may have a more focused portfolio, but they also possess valuable specialist knowledge. The methods listed in para. 42 are provided as examples and are not intended to be mandatory.

It has been observed that smaller institutions find the data collection requirements to be too onerous, as evidenced by the current scoring methodology. Therefore, it may be advisable to emphasize proportionality. [AB1] To facilitate compliance with the risk management principles the guidelines should provide guidance on the notion of significant SME and large corporate counterparties.

At present, institutions may face challenges in empirically detecting the impact of ESG issues on the PD or calculating the ESG-sensitivity of the risk premium. This information is crucial for adjusting financial terms.

Regarding para. 42 a, it may be noted that intervening in the counterparty's risk management falls outside the scope of the institution's risk management. These principles are intended to apply solely to the institution's risk management. The term 'most critical counterparty' may benefit from a more precise definition. Furthermore, the requirements outlined in this section may be subject to the counterparty's sphere of influence, which may limit banks' insight and influence. Moreover, one must stress that the assessment of counterparties transition plans can potentially be a very resource intense exercise. Banks shall be allowed to assume that transition plans of clients reporting according to CSRD or other internationally recognized standards (e.g. SBTi) are sound.

It is our belief that the information provided in   para. 42 d), such as 'by economic sector or geographical area,' is intended as an illustrative example and should not be regarded as a mandatory criterion. The example could be removed as the bank establishes its own standards for diversification, considering various factors. Although ESG criteria are significant, they are of secondary importance in this context.

Additionally, we have concerns that the evaluation of the processes of major borrowers goes beyond their capacity to identify and mitigate greenwashing risks. To ensure proportionality, we suggest exempting at least LSIs and SNCIs from this obligation. Our recommendation is to eliminate the greenwashing requirements.

Question 11: Do you have comments on section 5.2 – consideration of ESG risks in strategies and business models?

Regarding SNCIs, it may be sufficient to conduct a qualitative analysis of strategy and risk appetite as part of the materiality assessment in accordance with para. 11.

For small and medium-sized institutions, it may be acceptable to consider not creating transition plans, as the analyses and activities involved are already part of the current strategy process. It may not be necessary to reiterate the necessary key figures in laborious plans.

Question 12: Do you have comments on section 5.3 – consideration of ESG risks in risk appetite?

It is important to note that ESG contributes to the known risk types for which risk limits and capital are allocated. Hence, ESBG believes it would be helpful if EBA could provide additional information in the guidelines on the type of disclosure related to the ESG Key Risk Indicators and the level of granularity that is expected, especially as reference is made to the extensive requirements in section 6.3.

To ensure proportionality, the granularity of the requirements should be adjusted. Institutions should be granted more flexibility in defining their ESG risk appetite, taking into account factors such as business model, size, and portfolio structure. For example, it may be considered excessively granular for large institutions with a diversified business model to provide a higher level of detail than at the country level. As with other sections of this consultation paper, we kindly request that this be limited to key assets, material products, and services.

Question 13: Do you have comments on section 5.4 – consideration of ESG risks in internal culture, capabilities and controls?

The EBA Guidelines on Internal Governance offer a comprehensive framework for implementing an appropriate risk culture and the concept of the three lines of defence. However, some institutions may find Section 5.4. to be overly restrictive with regard to ESG, and therefore it may be worth considering its removal to streamline the already detailed guidelines. 

Question 14: Do you have comments on section 5.5 – consideration of ESG risks in ICAAP and ILAAP?

As stated in question 10, it is assumed that the risk observation horizon in the ICAAP remains unchanged in both the normative and economic perspectives. Additionally, it is assumed that no multi-year risk-bearing capacity calculation is required beyond the normative perspective period. The 10-year time horizon will provide information on possible ESG risk factors for the normative (3-5 years) and economic (1 year) perspectives. It may not be advisable to employ internal capital as a means of mitigating medium and long-term risks. We ask for considering further this matter.  Additionaly, to the best of our knowledge, the EBA has not used the terms “economic” and “regulatory” perspectives in its previous supervisory publications. A clear definition of these two terms are therefore necessary and would be highly appreciated.

We would also appreciate further clarification on para. 57, section 4.2, to ensure that the longer-term alignment method in the ICAAP remains unaffected. Furthermore, it may be beneficial to permit small institutions to utilize qualitative methods.

Question 15: Do you have comments on section 5.6 – consideration of ESG risks in credit risk policies and procedures?

Paragraph 61 suggests the use of quantitative methods, but it does not explicitly state whether institutions may initially use qualitative methods if quantitative methods are not yet appropriate. To improve clarity, it may be helpful to add a clarification, as the necessary data may not be available to determine the required quantification. In certain areas and for certain institutions, the use of qualitative methods should be permanently available. The credit ratings established today take into account both quantitative and qualitative aspects, including ESG risks.   

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?

ESBG notes that article 4.1 point 52d in the CRR3 provides that “environmental, social and governance risk” or “ESG risk” means the risk of any negative financial impact on the institution stemming from the current or prospective impacts of environmental, social or governance (ESG) factors on the institution’s counterparties or invested assets; ESG risks materialise through the traditional categories of financial risks.” This definition indicates that ESG risks are of an indirect and not a direct nature. In view of the above, ESBG is of the opinion that when it comes to paragraphs 63 and 66 of the guidelines, the EBA should stick to the CRR3 text and should not go beyond its mandate.

To dig further, ESBG believes it is unrealistic to require/expect that banks can quantify the effects of environmental risks. Precisely as pointed out at the beginning in the draft guidelines, these are risks that lie ahead of us and where we lack data. Such quantifications will be "guesstimates" at best. At this point, the guideline should clarify the expectations for precision and quality in the quantification based on these premises. The draft guidelines propose that institutions should identify, assess, and monitor ESG concentration risk, defined as the risk of loss resulting from an institution's exposure to a single or a group of counterparties, sectors, regions, or countries adversely affected by ESG factors. 

The draft guidelines also suggest that institutions should set internal limits for ESG concentration risk and report any breaches to the management body and the competent authorities. ESG concentration risk is an important dimension of ESG risk management, and institutions should consider the potential impact of ESG factors on their exposures.  However, the draft guidelines appear too prescriptive and rigid in defining and measuring ESG concentration risk. The EBA should consider allowing more flexibility and proportionality for institutions to define and measure ESG concentration risk according to their own methodologies, risk appetite and business models. 

In order to address the reputational risk associated with banks failing to comply with their sustainability commitments or transition plans (para. 67), it is recommended that the EBA specify that these plans are dependent on the EU's and Member States' commitments to achieve climate neutrality, as outlined in the EU Climate Law. Additionally, it should be noted that while reputational risks may have an indirect impact on financial materiality, they are not considered significant for LSIs in particular. It is suggested that banks should not be held solely responsible in the event that the EU or member states fail to meet or change their targets. In addition, it is recommended that mitigation measures, such as insurance, be added to the operational risks. 

ESBG would like to suggest that qualitative methods be permanently permitted for all paragraphs in section 5.7, at least for LSIs. 

With regard to para. 68, it is suggested that the requirements may appear overly detailed. The internal risk management of institutions takes into account concentration risk, and the necessary processes have been established and are currently operational.

Question 17: Do you have comments on section 5.8 – monitoring of ESG risks?

First of all, with regard [AB1] [AB2] to paragraph 70 and 72, would it be possible to provide further clarification on the term 'most significant portfolio'?  

In relation to the metrics and indicators mentioned in para. 72, ESBG would like to offer the following comments: 

• Regarding point a), it may be challenging to accurately determine the extent to which historical losses of borrowers are attributable to ESG factors. Historical data may not allow for precise quantification, and it may be necessary to generate additional data to gain a more comprehensive understanding. It is suggested that the requirements of the supervisory authority should not be excessively strict in terms of their binding nature and methodology. 
• In relation to point b), it is recommended that the provision be kept more general and the reference to Annex I of Regulation (EC) 1893/2006 be deleted as it does not make sense at the aggregation level of NACE 1. 
• With regard to point c), it is proposed that the comparison of portfolios should relate to the institution itself and not to the portfolios of borrowers with whom the institution has an exposure.
• Regarding point d), it is currently challenging to record Scope 3 emissions due to limited data availability.
• Concerning point e), Article 430 CRR, lit. h (ii) mandates reporting of both existing and new exposures to entities in the fossil fuel sector. To prevent duplications, it is recommended that the monitoring requirements in para. 72 (e) be aligned with the reporting requirements that are yet to be developed in the area of ESG, or be deferred until their development. Moreover, it may be more suitable to refer to a volume measure, such as credit exposure, rather than specifying the percentage of borrowers.
• Regarding point f), it is important to note that reporting institutions are already obliged, according to Article 8 of the Taxonomy Regulation, to report information on their taxonomy eligibility and alignment. It is our belief that indicators such as the Green Asset Ratio (GAR), which describe the portion of assets that comply with the taxonomy, may not be the most suitable for reflecting the sustainability profile of institutions. The identified issues with the methodology and sectoral coverage, as well as the lack of management implications and risk content information in the taxonomy and GAR, suggest that monitoring KPIs related to the taxonomy in accordance with para. 72 may not be advisable. 

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?

It is suggested that disclosure of transition plans should be limited to institutions addressed by CSRD and CSDDD. Requiring smaller and medium-sized institutions to do so may put them at a disadvantage. However, it is recommended that larger, internationally-oriented banks should build on these detailed transition plans.

Question 19: Do you have comments on section 6.2 – governance of plans required by the CRD?

Institutions already are required to identify, assess, and manage all material risks. This includes ESG risk factors. The identification process is based on the impact of ESG risk factors on the institution's business model and strategy. It is also important to analyze how transitory risks, such as those arising from political requirements, may affect the institution. The insights gained from this process are used to inform the strategic and operational management of the institution through the strategy process, which is supported by KPIs and KRIs. The risk management of ESG risks is outlined in the risk strategy and other frameworks, which include methods and instruments for managing short, medium, and long-term ESG risks. In accordance with CRD VI (Art. 76(2)), Member States have the option to provide waivers or facilitation measures for small, non-complex institutions when developing transitional plans. 

It is our belief that smaller and less complex institutions should not be subjected to an undue amount of bureaucratic red tape. We hold the view that the current regulations pertaining to ESG risks and reporting are sufficient for these institutions. Rather, we suggest that we allow the comprehensive ESG regulations that have already been introduced to take effect. Additionally, we recommend that the EBA guidelines take into account the waiver option for SNCIs as outlined in CRD VI. It is suggested that SNCIs may not be required to provide and maintain transition plans, as this could potentially burden them with extensive data collection from customers, particularly SMEs.

The proportionality principle outlined in the CRD (waiver for SNCIs) must also be taken into account in the guideline.

The institution's plans, objectives, and processes for the future, as required by Art. 76(2) of CRD VI, should also address the risks associated with adjustment processes and the transition to regulatory objectives, such as those outlined in the EU Climate Law. It is recommended that these plans align with any sustainability reporting plans already disclosed by the institution as part of CSRD. ESBG reiterates this comment regarding article 104 (1m) CRD VI (which provides "through adjustments to their business strategies, governance and risk management for which a reinforcement of the targets, measures, and actions included in their plans to be prepared in accordance with Article 76(2) could be requested.") It is worth noting that institutions meeting the definition of SNCIs under the CSRD are considered SMEs for reporting purposes. As such, they are only required to comply with the corresponding reporting obligations starting from the 2026 financial year, if reporting is required for the first time. Therefore, it is recommended that any regulations for SNCIs should not be provided before this deadline. 

Additionally, it is important to note that the reporting scope for SNCIs under the CSRD does not include a reporting obligation for transition plans. When drafting the EBA guidelines, it is important to consider the following: the dialogue with counterparties regarding their transition plans, and ensuring consistency with the institution's own transition planning (as described in para. 86. Finally, when it comes to para.86.a),Banks shall be allowed to assume that transition plans of clients reporting according to CSRD or other internationally recognized standards (e.g. SBTi) are sound.

When drafting the EBA guidelines, it is important to consider the following: the dialogue with counterparties regarding their transition plans, and ensuring consistency with the institution's own transition planning (as described in para. 86). It may be worth considering whether the task of the first line of defence is too extensive. Furthermore, assessing the institution's own ESG risks does not necessarily have to be based solely on the customer's transition planning. It is often observed that smaller institutions have a significant number of customers who may not have transition plans in place.

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?

As regards the proposed approach on metrics and targets in the guidelines it should be stressed that strategic targets should not be used as a risk management tool. Moreover,  targets are only effective and efficient if they have a single and not multiple purpose. Para. 90 would therefore benefit from being rephrased as follows:

"The targets set by institutions should serve strategic steering purposes with a view to achieve strategic goals while also considering risks stemming from the process of adjustment towards the legal and regulatory sustainability objectives of the jurisdictions where they operate, and broader transition trends towards a sustainable economy." For institutions that have already set strategic climate targets (as part of voluntary commitments) it should be sufficient to refer to those targets in their CRD-plan.

It may be advisable to tailor targets to the specific needs of each institution, taking into account factors such as business model, size, and level of commitment. Given the regulatory nature of these aspects, it may be appropriate to consider removing para. 91 altogether. It may be beneficial to consider granting institutions greater flexibility in selecting indicators.

There appears to be some ambiguity surrounding para. 94 a) (GHG emissions). While the institutions are required to have funded emission targets at the sectoral level, interim reduction targets are stated as intensities rather than financed emissions.  Additionally, it is unclear what percentage of borrowers are required in para. 94 e). It may be more appropriate to refer to a suitable volume measure, such as credit exposure.In the event that the EBA guidelines specify specific indicators, it would be advisable to include a presentation of these key figures to ensure that the requirements for a transition plan are met, particularly for smaller institutions. Overall, ESBG believes that the metrics listed in para. 94   should be viewed as suggestions rather than a list of minimum mandatory metrics. In particular,  the guidelines should not require institutions to set targets for metrics that are based on specific scenarios (e.g. the IEA NZ2050). If minimum requirements are kept those should be concentrated to climate related factors (GHG, energy efficiency).

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?

The requirements outlined in section 6.4 may not be suitable for regional institutions and LSIs due to their level of detail. Specifically, para. 97 is deemed excessive and should be revised in the interest of proportionality. It is suggested that the final sentence be changed to read, 'To this end, institutions should take appropriate steps. For example:' rather than listing specific actions.

Additionally, the exception for SNCIs in para. 94, which states that they should consider the requirements, is a useful addition. It may be worth considering the addition of a similar provision for para. 96. Another option could be to make only para. 96 a) binding for SNCIs, as the other dimensions are typically not essential for them.

Question 22: Do you have comments on section 6.5 – transition planning?

It is our understanding that chapter 6.5 is suitable only for GSIBs given its regulatory nature. 

The extensive requirements for transition plans may present practical challenges, and the utilization and processing of information from borrowers' transition plans may require significant effort. It is worth noting that an institution's transition plan is not required to incorporate information from borrowers' transition plans. ESBG suggests that para. 101 should be limited to material products and services. 

With regard to para. 103, it is believed that the expectation for banks to advise their clients on adjustments to the product offering, agreement of an action plan, and remedial measures to support an improved transition path for the counterparty is too far-reaching. It is important to note that banks are ultimately incentivised to reduce risk. Therefore, it may be worth considering an opening clause for a general waiver. Additionally, it is believed that automated analyses, such as ESG scores, should be sufficient.

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?

It is our understanding that the guidelines may be considered overly detailed. ESBG would suggest that the level of detail be re-evaluated to ensure that it is suitable for all situations. Furthermore, we recommend that the concept of materiality be given greater consideration in relation to transition plans.

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?

ESBG would like to stress that standardisation may not be the most appropriate approach as it may not fully capture the proportional structure based on the bank's risk profile or the risk content of the transactions.

It is proposed that the guidelines should give priority to the need to ensure that:

• essential data is accessible through ESAP, and
• refraining from using data that is not disclosed due to sustainability reporting and CSDDD requirements to avoid excessive regulation, particularly for smaller institutions.

It may be beneficial to consider the implementation of consistent regulatory requirements across different frameworks. One potential area of focus could be the concept of financial materiality (CSRD), which could be applied universally. This could result in a single general risk inventory that could be used for all regulatory purposes.

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.

Possible examples of instruments could be considered to allow for customization of the instruments used by the bank. Managing ESG data, particularly its availability from counterparties in the SME sector, presents a significant challenge. In this context, it may be worth exploring the option of centralised data provision. Moreover, it is worth noting that the implementation of the guideline may require a significant amount of time, particularly for larger institutions. Therefore, it would be advisable to clarify the acceptability of qualitative methods in the initial stages and the specific ways in which they can be used. It is recommended that data requirements be designed in such a way that they can be met using the data provided through other reporting or disclosure obligations.

Additionally, it is possible that small institutions could face challenges in creating transition plans and implementing risk management methods.

Question 26: Do you have other comments on the draft guidelines?

ESBG would like to stress the following remarks:

• The CSRD has been in force since 1 January 2024 and those who are under the scope are already preparing for the upcoming disclosure requirements. The aim of the CSRD is to increase the account-ability of European companies on sustainability aspects, both on quantitative and qualitative level. The figures disclosed in the forthcoming reports audited by external auditors should be suitable to be used by FIs in their assessments and disclosures described in this guideline in order to fulfil the require-ments. It would therefore be welcome if this were explicitly mentioned in the guideline and - where appropriate – referencing stronger to the CSRD.
• The proposed timeline is quite ambitious and unrealistic, given the complexity and novelty of ESG risk management and the challenges. Institutions should be granted an additional transition period for fully meeting the Guidelines’ requirements. The implementation deadline should be extended by at least 24 months and allow for a phased and gradual implementation of the ESG risk management framework, taking into account the different levels of maturity and readiness of institutions and the availability of reliable and comparable ESG data and methodologies
• The draft discussed ESG risks more generally as risks we have not experienced and where there is a lack of data and experience. This is correct as regards the environmental risks, but not to the same extent for social and governance. Social and governance risks are known risks where a lot of experience data is already available. What may be new here is that such risks can also be expected to receive increased attention from the "public", but we have already seen that for quite a few years.
• In continuation of this, one should also consider the differences between the environmental risks and the social and governance risks. The environmental risks are more systemic in nature. They affect the whole world very widely and are, as such, difficult to avoid. They, therefore, have both a generally higher degree of severity and a far higher degree of complexity than the social and governance risks. While environmental risks have the potential to affect entire customer segments/industries, the effects of social and governance risks are expected to, to a larger extent, affect individual customers individually.
• The presentation of environmental risks focused on the climate aspect and could have highlighted the nature aspect more clearly. Nature risk can quickly prove to be at least as important for certain industries on the customer side.
• Regulatory risk  could be added in the risk descriptions, as   authorities and politics increasingly seem to view the bank and finance industry as part of the "solution" or a part of the toolbox. This results in increased obligations and expectations for the industry also in non-bank regulations (e.g., the building energy directive, potentially in the deforestation regulation, etc.).  [AB1] .
• It is important to apply the principle of proportionality. Hence, it could mean that small, non-complex institutions consider reviewing their risk strategies/policies every two years, as per the option provided in Article 76 (1) of CRD VI.. This is particularly relevant as all institutions are to be subject to a minimum cycle of two years in accordance with Article 76 (1) sentence 1 CRD VI.

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