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?
It could be more concrete by giving precise quantifiable targets in medium-term, for example in terms of GAR or BTAR over a horizon of time (3, 5, 10 years). Or in terms of exposure toward carbon intensive sectors. To succeed the transition, it is necessary to progressively divest from certain existing activities that are highly emitting or polluting and to finance the development of new activities that would contribute to a more resilient and sustainable economy, such as recycling, second-hand markets, waste treatment, local productions and short circuits etc. In the same vein, paragraph 15 sounds not consistent with the rest of the section on transition plans because these plans should lead to a progressive decrease of exposure toward sectors or activities with high emissions or environmental impact, unless these sectors or activities undergo significant transformations in their economic model.
Question 2: Do you have comments on the proportionality approach taken by the EBA for these guidelines?
No comments.
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 consideration of other environmental objectives and of social and governance aspects requires an assessment of the entire production chain. E.g. electric vehicles production: what are the emissions and the impact on ecosystems and social aspects of the entire production chain (mining activity to extract necessary metals, production activity, assembly, transportation etc.), and how will be managed existing thermal vehicles when they will no longer be used? Can the electric vehicles be recycled at the end of their life? The development and financing of recycling activities/sector should therefore be encouraged. Additionally, innovative technologies may indeed enable energy savings, on the assumption of constant usage, not increasing - which is often the case (e.g. thermal vehicles consume nowadays less fuel compared to 40 years ago, but we use many more vehicles than before, more complex and heavier; overall emissions are therefore much higher than they were 40 years ago). That is why, the development and financing of 'low-tech' technologies (which use less resources and short circuits) or the production of lighter or less sophisticated and local products can in some cases be suitable for a more sustainable and resilient economy.
Question 4: Do you have comments on the materiality assessment to be performed by institutions?
The consideration of the materiality of ESG risks by banks is essential. However, there should be further clarification on how this materiality should be measured; if the impact on traditional risk categories is preferred/prioritized, there should be sufficient clear instructions for banks to integrate ESG factors into credit, market, operational risk models. The double materiality should be considered when assessing counterparties (the impact of their activities on the environment and social aspects can contribute not only on the degradation of environmental and climate but also to an increase of their reputational risk), which would also allow to be more consistent with other EU texts such as the CSRD directive. Moreover, the materially of the economic activities on the environment or social aspects could be considered as a source of systemic risk.
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.
I agree. However, the Taxonomy alignment could be used to assess the materiality of the transition risk for each portfolio. Regarding physical risk, areas at high risk of drought, flooding, marine submersion, water stress, soil erosion etc. should be considered a priority for materiality. For general loans (i.e., where the purpose of the loan is not specified), materiality should be considered for all activities addresses within a group, and not just for the headquarters addresses. Supporting evidence regarding the use of loaned funds could be requested from counterparties.
Question 6: Do you have comments on the data processes that institutions should have in place with regard to ESG risks?
Any concrete measures/indicators that banks must use to materialize the impacts on the environment other than those related to climate change? E.g. the quantity of toxic elements and waste released into nature, the recycling rate of products, the quantity of packaging or plastic used, etc. Only qualitative data are to be requested from counterparties for the social or governance aspects at this stage?
Question 7: Do you have comments on the measurement and assessment principles?
A list of KRI to be used would be useful. Examples for the transition risk: Identify the green assets and calculate the green asset ratio (overall and at the portfolio level), scope 1,2,3 emissions, alignment measures by sector etc. Medium/long-term objectives in terms of GAR/BTAR threshold could be set. Indeed, it is important that these ratios be considered by banks not only for disclosure purpose (given that not all investors are sufficiently sensitive to ESG issues). Regarding the physical risk, institutions should develop or adopt methodologies to assess the cost of damages and collateral impairment, and then integrate the relative expected losses into traditional risk models at least for internal capital calculation purpose.
Question 8: Do you have comments on the exposure-based methodology?
No comments.
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.
Will penalties and/or remediation measures/actions be imposed when the portfolio's gap from these objectives is significant ? In a perspective of aligning portfolios with the climate target, the regulator could clearly define the criteria that banks must consider in the loan origination process.
Question 10: Do you have comments on the ESG risks management principles?
No comments.
Question 11: Do you have comments on section 5.2 – consideration of ESG risks in strategies and business models?
What would be the incentive for institutions to change strategy/business model if exposure to ESG risks are not subject to regulatory limits, significant capital charge or other regulatory penalties ? Furthermore, although some transition activities may represent short and medium-term investment opportunities, if the regulator does not require institutions to have a medium to long-term activity strategy and to demonstrate the sustainability of their business model, it is not certain that their leaders/decision-makers will consider horizons beyond the term of their mandate.
Question 12: Do you have comments on section 5.3 – consideration of ESG risks in risk appetite?
What will happen if the institution has a large (ESG) risk appetite ? Should it be covered by an additional internal capital?
Question 13: Do you have comments on section 5.4 – consideration of ESG risks in internal culture, capabilities and controls?
No comments.
Question 14: Do you have comments on section 5.5 – consideration of ESG risks in ICAAP and ILAAP?
Are institutions free in terms of methodologies to use for the evaluation of internal capital relative to their ESG risks/factors?
Question 15: Do you have comments on section 5.6 – consideration of ESG risks in credit risk policies and procedures?
Are institutions free in terms of methods/models to measure the impact of ESG risks in credit risk?
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?
Are institutions free in terms of methods/models for the assessment of these risks ?
Question 17: Do you have comments on section 5.8 – monitoring of ESG risks?
Most of the points in paragraph 72 are part of what is required to disclose under the ITS Pillar 3 ESG. Institutions listed on an EU market (all institutions after the entry into force of CRR3) are therefore supposed to already produce what is requested in this paragraph. The novelty here would be to define the P3 ESG alignment measures and ratios as Key Risk Indicators (KRIs) and to set targets on them over the medium and long term.
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?
No comments.
Question 19: Do you have comments on section 6.2 – governance of plans required by the CRD?
No comments.
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?
Regulatory medium-term benchmarks would be useful. Other metrics that can be considered: GAR and BTAR.
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?
For the physical risk, should transition plans lead to a divestment from the geographical areas which are significantly impacted from climate hazards under the different scenarios?
Question 22: Do you have comments on section 6.5 – transition planning?
Do transition plans consist solely of achieving objectives in terms of CO2 emissions, meaning only what is related to climate change? If yes, it means that other objectives of the EU Taxonomy are not considered at this stage?
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?
A clear and precise list of sustainability objectives to reach would be useful. This list could include all the sustainability objectives covered by the EU Taxonomy (not only those related to the climate change). Especially objectives such as waste treatment, recycling and repair of products, limiting water and soil pollution, limiting the over-exploitation of natural resources (e.g. over-fishing) etc., which could also lead to a development of new (sustainable) activities and create therefore new investment opportunities for banking institutions.
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?
See the previous comment.
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 main challenges for the implementation of these GLs are the retrieval and processing of ESG data by banks and their integration and treatment into internal information systems and risk assessment models. As a result, a divergence between institutions regarding the consideration of ESG criteria/factors in business strategy, internal governance, and risk management framework could be observed in the years to come. A list of clear and precise criteria, (key performance/risk) indicators, and sustainability objectives to be achieved (which may evolve over time) could be defined by the regulator, capitalizing in particular on the information that banks already produce/will produce as part of the Pillar 3 ESG, EU Taxonomy, and NFRD/CSRD, while setting medium-term thresholds/targets to be reached. Finally, there should be sufficient clear instructions for banks to integrate ESG factors into credit, market, operational risk models.
Question 26: Do you have other comments on the draft guidelines?
No additional comments.