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?
Concerning Article 76(2) of the CRD and Article 87a as referenced in the EBA's understanding of Article 76(2): “This assessment shall take into account the institutions’ sustainability-related product offering, their transition finance policies, related loan origination policies, and ESG related targets and limits."
70% of Europe’s citizens live in cities. Cities are facing vast climate adaptation issues and equal opportunity challenges to solve at the same time. These challenges require innovation and social justice. Banks can be allies with cities with investments which consider all of these factors.
ESG policies can be a tool for financial institutions to align with cities, regions and local democracies to conform with other EU requirements in particular under CSRD and the draft CSDDD. The consideration of specific timelines, intermediate quantifiable targets and milestones is important in a scalable manner.
Example: The Investionsbank Berlin engages with The City of Berlin’s Senate quarterly to align its portfolio with the city’s housing policies.
Question 2: Do you have comments on the proportionality approach taken by the EBA for these guidelines?
Concerning 3.4 21 – Proportionality: Cities have diverse climate and economic risk profiles which can inform the EBA’s proportionality approach. These guidelines can be further enhanced by increased alignment with the risk mitigation policies of cities, regions and other local democracies.
As a result of climate change, regions and cities have to deal with under- or overpopulation, depopulation and migration risks. Economic dynamics related to climate and population require long-term investments.
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.
Climate, environmental and social and governance risks are completely intertwined in cities, regions and local democracies. Based on our experience, there is scope for the EBA to develop a framework which can help local authorities and institutions and their counterparties understand the interaction between these dynamics in cities, regions and local democracies to be able to better align portfolios and investments.
Further guidance from city science offices, universities and municipal or regional statistics offices may be beneficial in thecalibration and anticipation of compound risks stemming from the interaction of climate, environmental, social and governance risks in urban environments.
Example: The adaption of housing to climate change is a widescale challenge (affordable housing is currently the number one challenge across European cities). Climate mitigation and adaptation is costly. High-income households can afford to implement these measures independently whilst low-income households rely upon public administrations to implement them. Adapting small apartments in regions of Rome or Athens, where extreme heat commonly persists throughout the day and night has the potential to reduce the risk of heat catalysing social tensions. While also mitigating the serious health effects of heat stress in senior citizens, young children and other groups of people who have extreme levels of vulnerability to heat stress.
Question 4: Do you have comments on the materiality assessment to be performed by institutions?
Financial institutions may further qualify and standardise materiality assessments in consultation with cities, regions and local democracies which certify credentials of environmental and societal investments. In instances where the urban environment is the territory within which institutions and their counterparties operate, particularly companies face ESG risks.
The intersection of environmental and societal investments needs to consider the development of indicators for the adjustment of the frequency of materiality assessments and their methodologies. Particularly in transition plans that are concerned with the engagement of SMEs and social enterprises, this is pivotal.
Example: The European Investment Fund has also stressed the importance of engaging to "achieve a successful climate transition". This includes reducing of emissions within cities and regions, improving air quality, and providing health benefits for the residents, while simultaneously reducing overheads for SMEs and social enterprises and including them all of them in future ESG policy formation. (source: The European Investment Fund’s Operational Plan 2023-2025. )
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.
Cities, regions and urban democracies have widely divergent climate contexts which shape their unique physical risks, social risks and governance risk profiles. Many significant risks stemming from the interaction between physical risks, social risks and governance risks may yet need to be identified.
The EBA could additionally advise institutions whose counterparties work within cities, regions and urban democracies to identify these risks proactively as part of materiality assessments. With specific reference to each unique operating environment.
There may be scope for the guidelines to provide similar requirements for the materiality assessment of physical risks, social risks and governance risks and compound effects stemming from their interaction in cities.
Question 6: Do you have comments on the data processes that institutions should have in place with regard to ESG risks?
Cities, regions and local democracies can offer ground truth to check if findings in data make sense. Cities and universities can play a unique and pivotal role in assessing and validating data results for consultation with and by institutions and their counterparties.
There may be scope for institutions to augment their data processes with the inclusion of spontaneous and live datasets to enhance their capabilities for the anticipation of ESG risk factors.
It would be good to include civil society organisations as additional players since they work with, have knowledge and data and can support data processes (including validation/ auditing) in relation to the E and S of ESG.
Rigorous governance procedures are required in the collection and management of live datasets and the deployment ofGenerative AI to predict particular environmental and social risks following existing and emerging EU legislation.
Question 7: Do you have comments on the measurement and assessment principles?
We note the widescale call for standardized ESG measurement metrics, methodologies and assessment principles which strive to have parity across asset classes and jurisdictions. New data approaches will have to be developed as a positive step towards developing scalable measurements with parity across diverse urban and regional environments in multiple jurisdictions. Such measurements also need to account for changes over time in the short medium and long term in climate transition financing.
Consultation with universities and city science officers may be beneficial in augmenting the quality of measurement and assessment principles in local environments.
The need for better measurements is also requested by others:
- The MIT Aggregate Confusion Project indicates disparity across ESG indices to the extent that some FTSE 100 companies are in the top 5% on one ESG rating algorithm and the bottom 20% on another
https://mitsloan.mit.edu/sustainability-initiative/aggregate-confusion-project
- The OECD has reported on lack of standardized metrics and methodologies leading to inconsistencies in how ESG ratings measure environmental impact and climate alignment.
https://www.oecd-ilibrary.org/sites/e9ed300b-en/index.html?itemId=%2Fcontent%2Fcomponent%2Fe9ed300b-en
Question 8: Do you have comments on the exposure-based methodology?
Because of the fast developments in data use and artificial intelligence, the relation between qualitative data and quantitative data is rapidly changing. Consultation with universities may be beneficial in augmenting methodologies for social exposure.
Cities’ data offer insight into demographic, ecological, cultural and economic dynamics, which predict and confirm possible avenues of risk. Also in cities and regions, a variety of structures are implemented to observe and analyse what is happening, to observe ‘ground truth’ in data terms.
To successfully establish and critically, maintain the level of granularity needed for appropriate social risk analysis, new methodologies are being developed that include qualitative and quantitative data.
Financial Institutions may seek scientific validation from universities when developing and using new methodologies while realising that across Europe, City/ University partnerships are rather heterogenous.
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.
Cities need financial support, expertise and means to facilitate necessary climate change mitigations. The guidelines can provide further details on measuring the availability of local schemes, integrating SMEs and social enterprises across urban and regional environments as part of a comprehensive alignment of methodologies in the context of energy transition and the IEA net zero scenario.
Financial institutions can facilitate information sharing between regions, cities and urban democracies with diverse climate risk profiles. For example, climate portfolios in Hamburg are different from those of Marseille – It is crucial that institutions are aware and learn from these different constituencies and to tune their actions in areas where their portfolios correspond, specifically in areas in which they are counterparties to institutions.
Aligning their locally derived climate responses and funding frameworks in a comparable manner for institutions and their counterparties will give a great opportunity for assessing ESG risks across the EU and third countries. Especially in climate adaptation which has a lot of social implications, new standards make comparisons possible while at the same time highlighting differences.
Example: The 100 Climate Neutral Cities EU program, which aims to have 100 cities in Europe with zero emissions by 2030, requires cities to make local ‘climate contracts’. The ‘climate contract’ is a standardised form which allows for a great variety of locally tailored alliances between municipalities, businesses, financial institutions and civic society.
Question 10: Do you have comments on the ESG risks management principles?
Concerning paragraph 152 of EBA Guidelines on Internal Governance 21, we recommend the assessment of social risks with qualified and certified public offices and their officers in regions, cities and urban environments to identify the "most critical counterparties’ in urban environments.
Particularly in the case of "significant SME or real estate portfolios" and social enterprises which have businesses concerned with climate transition and require migration from short to long-term funding horizons.
Concerning ESG risk management principles, these all need to nourish diversity and embrace design interventions in the complex systems that regions, cities and urban democracies have become.
Example – The river Meuse needed to extend its floodplain to prevent more flooding. The interests of residents, SME’s and business are intertwined here. As are concomitant social, environmental and governance risks for institutions and their counterparties operating in this region.
Significant short, mid and long-term investments are necessary for the displacement and relocation of residents, industrial units and businesses from the floodplain. This is both a climate and social issue as well as a complex governance issue which includes compound risks stemming from this movement, particularly in inter-territory negotiations between adjacent EU member states in negotiations for the relocation of communities and industrial facilities up or down stream of floodplains.
Question 11: Do you have comments on section 5.2 – consideration of ESG risks in strategies and business models?
In reference to 5.2 a, we recommend the assessment of the interaction of climate and social risks in urban environments in the context of understanding the changes which these interactions necessitate in the transition to a sustainable economy to achieve net zero emissions targets.
Particularly considering the transition from short-term funding models to medium and long-term funding models for SMEs and social enterprises. To enhance financial resilience and concomitant social resilience as positive outcomes from ESG risk-related strategic objectives.
ESG risks in strategies and business models concerned with the transition from short to medium and long-term funding models require dedicated consultation between the regions, cities and urban democracies and institutions
As the European Investment Fund details – to successfully engage SME’s, which constitute 98% of businesses in EU, there is a need for consultation on public funding for frameworks which accelerate the growth of innovative companies with the express purpose of enabling these companies to sustain private capital investments on a long term basis.
Question 12: Do you have comments on section 5.3 – consideration of ESG risks in risk appetite?
We recommend the consideration of the insights of cities and regions in determining criteria for ESG-related key risk indicators (KRIs) in urban environments. Particularly concerning "jurisdictions and more granular geographical areas, economic sectors,activities and products, including as regards the portfolio’s concentration and diversification objectives."
With special consideration to adverse compound effects stemming from underinvestment in environmental and socialinitiatives which have the potential to devalue "products or financial instruments issued, originated or held by the institution" in the long term.
Regions, cities and urban democracies are complex systems which always create compound effects which have to be anticipated when defining and re-assessing risk appetite.
Question 13: Do you have comments on section 5.4 – consideration of ESG risks in internal culture, capabilities and controls?
With reference to 5.49, we stress that all urban challenges require integral thinking and design phases with an interdisciplinary approach.
There may be scope for institutions to further develop relationships with universities, cities and city science offices to strengthen their internal culture, capabilities and control capacities. With respect of understanding and interpreting scientifically verified ESG risks which are particular to environmental and social investments in regions, cities and urban environments.
Addressing trust, knowledge and perception gaps between the public sector and institutions and their counterparties’ internal cultures and controls is a key challenge. Overcoming this challenge is critical to the development of sufficiently high levels of understanding of ESG risks for the administration of climate transition finance. Particularly regarding assessing the need for transition plans it is important to move from short-term funding horizons to medium and long-term funding horizons.
In the context of the EU's NetZero Cities Mission, cities have to make the so called ‘climate contracts’ between different parties. ESG risk plays a significant role in these. Financial institutions need to be aware of these confusing dynamics and developing a new framework as referred to in Question 3, may help.
Question 14: Do you have comments on section 5.5 – consideration of ESG risks in ICAAP and ILAAP?
Concerning 5.56, we require attention to the scope for institutions and their counterparties to further develop relationships with universities, cities and city science offices to strengthen their capacity to understand and interpret the ESG risks in environmental and social investments in urban environments.
To comply with the objectives of Basel II Pillar 2 identifying and measuring internal capital needs for individual exposures or portfolios assessed as more vulnerable to ESG risks.
Particularly concerning assessing the need for transition plans to transform projects with existing short-term funding horizons to projects which conform to ESG objectives and comply with relevant legislation with medium and long-term horizons. As we detail in our response to Question 16.
Question 15: Do you have comments on section 5.6 – consideration of ESG risks in credit risk policies and procedures?
Concerning 5.61, we advise institutions to consult with universities, cities and city science offices on the interaction of climate challenges and social factors in determining risk metrics in credit risks and procedures and their compound effects across loan and investment portfolios.
We consider the points we make throughout our response to this consultation on compound risks stemming from the interaction of social, and environmental to also apply to credit risk.
In particular, we ask attention to social risks stemming from deficiencies in climate adaptation measures in housing and small businesses. ESG transition risks in SMEs may surface in sufficient volumes to infer and effect significant portfolio risks for institutions and their counterparties.
Accordingly, we emphasise the importance of working to address the challenge of achieving parity across ESG risk indices for institutions and their counterparties. Through appropriate standardization metrics of ESG reporting variables – which allows for diverse local responses in source data whilst still making comparisons across the jurisdiction of the EU and third countries possible.
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?
We refer to The European Investment Fund's assertion that engagement with SMEs is critical to a successful climate transition.
In addition to The European Commission’s Renewed Sustainable Finance Strategy and the banking package (Directive 2013/36/EU (Capital Requirements Directive, CRD) and Regulation EU/575/2013 (Capital Requirements Regulation, CRR)) recognition of the financial sector's important role to play both in terms of supporting the transition towards a climate-neutral and sustainable economy, as enshrined in the Paris Agreement, the United Nations 2030 Agenda for Sustainable Development and the European Green Deal, and for managing financial risks that this transition may entail and/or stemming from other ESG factors. As the EU moves towards a 55% cut in emissions by 2030 and climate neutrality by 2050.
We agree with EBA's assertion that "The long-term nature and the profoundness of the transition process towards a climate-neutral and sustainable economy may entail significant changes in the business models of institutions and in the types and levels of risks they are confronted with"
When looking at cities in the financial landscape it is clear that for example Berlin, Odemira, Podgorica, Siena or Trondheim all have different risk profiles to which financial institutions and their counterparties need to be sensitive and remain up to date on the diversity of these risk profiles to define policies and procedures which anticipate their respective market, liquidity and funding, operational, reputational and concentration risks.
Specifically in 5.65 "ESG risks could affect net cash outflows (e.g. increased drawdowns of credit lines)" & 3.3 Social factors – such as human rights, health or working conditions as we referenced in our responses to questions 4 & 10 and governance factors – such as executive leadership or bribery and corruption – may also drive financial impacts on the institutions’ counterparties or invested assets and represent sources of financial risk that institutions should assess and manage
Question 17: Do you have comments on section 5.8 – monitoring of ESG risks?
Concerning 5.69 & 5.70, there may be scope to consult with universities and city science offices on methodologies fordetermining changes in the frequency of credit reviews in urban SMEs & social enterprises as ESG criteria are deployed toassess their eligibility for the transition from short-term to medium and long-term funding.
There may be scope for institutions to augment their data processes with the inclusion of live and spontaneous data setsto enhance their capabilities for the anticipation of ESG risk factors.
Rigorous governance procedures are required though in the collection and management of live datasets to maintain compliance with GDPR and other existing and emergent EU data legislation.
We refer to the demo CitiesDAO.org – a pilot initiative in The City of Amsterdam which monitors and assesses participation in collaborations between public and private sectors by design. This concept creates standardized and independently verifiable data reference points throughout the collaboration from inception to its ultimate qualification which can be assessed by accountants and other stakeholders.
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?
Concerning plans following Article 76(2) of Directive 2013/36, there may be scope for institutions to consult methodologies specific to urban areas for "establishing a set of different time horizons as part of their plans which should include a long-term planning horizon of at least 10 years. In addition, institutions should set an intermediate milestone at 2030" and assess the potentially novel business strategies counterparties devise to address climate risk which have a bearing on " profitability impact assessments, limits and risk thresholds, taking into account any transition risk stemming from departures from the institution’s planned trajectory"
In regions, cities and other local democracies, the social element of ESG policies is assessed and qualified with local policy benchmarks. Local policies are the result of participation and dialogue in local democracies. Municipalities and regional offices are significant financial institutions themselves and as such can align with the financial sector to support necessary transitions.
Example: The Bureau of Social Return in the City of Amsterdam has been operating a rigorous qualification and standardisation process for societal investments in procurement processes for the past 10 years. The Bureau currently oversees €160m in social return annually from the city’s procurement budget. The Bureau qualifies completed social return projects undertaken by the private sector for either certification by the city or disqualification and administration of a fine by the city for non-compliance.
Question 19: Do you have comments on section 6.2 – governance of plans required by the CRD?
Concerning 6.2 Governance (i) Roles and responsibilities 84, there could be scope for institutions to strengthen their capacity in the ongoing qualification of governance plans focused on urban areas. Particularly when focusing on prudential elements of the transition planning process.
Transition requires new business models, laws and specific governance approaches which we consider institutions and their counterparties need to be aware of and sensitive to to accurately assess ESG risks.
Example: In many EU member country jurisdictions by law, if an entity wants to use waste material to make a new product without pre-existing legal clearance, a 2-year legal process must be submitted to permit a change of use from ground material to waste material. This hinders the necessary innovation for the circular economy.
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?
We note that consultation with universities and city science offices may augment the granularity and quality of metrics and targets to be used in urban environments as part of the plans required by the CRD. To the extent that they may be standardized and scaled across very different urban environments across the jurisdiction of the EU.
Collaboration with universities is very important here. Metrics must be qualified scientifically with due consideration to both quantitive and qualitative methodologies in compliance with GDPR and other relevant EU existing and emerging data legislation.
The challenge to standardise diversity requires a specific data approach that balances local and global dynamics. Recent research argues that a “network of indicators” (Golio 2024) can help create a common framework between very different local realities.
Example: The Institute for Advanced Metropolitan Solutions (AMS) conceived of a new concept of monitoring 546 datasets, based on an analysis of 30 years of policy plans. The project has identified 7 key goals to create a framework with 8 monitors, 5 dimensions and 546 indicators which all relate to sources of capital and are qualified by scientific research in universities. “Amsterdam, just like other cities, faces several urban challenges, whereof most of these are intertwined. The Ideal(s) City project untangles these urban challenges and uses the ocean of information that is already available to gain new insights.” These metrics can be referenced by financial institutions and their counterparties who are seeking metrics and targets for assessing ESG risks in cities and urban democracies.
https://openresearch.amsterdam/en/page/91625/the-ideal-s-city-project
https://openresearch.amsterdam/en/page/88965/information-as-actor-finalised
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?
Consultation with universities, cities and city science offices may be beneficial for institutions in terms of both establishing new climate and environmental pathways and contributing to existing ones.
We note that there is a tension between plans and scenarios and real-time events, particularly climate and environmental events which are already in progress and those which emerge unexpectedly.
Example: Barbados’ successful negotiation of a ‘hurricane clause’ into sovereign debt.
https://www.imf.org/en/Publications/CR/Issues/2023/12/20/Barbados-2023-Article-IV-Consultation-and-Second-Reviews-Under-the-Arrangement-Under-the-542666
Question 22: Do you have comments on section 6.5 – transition planning?
About 6.5 Transition planning 102, we consider that consultation with cities, city science offices and universities may be beneficial for institutions in terms of both establishing new data processes and iterate upon existing ones with specific reference to urban environments. Cities are increasingly complex systems, especially when you connect ESG.
New data approaches are continually being developed in cities, with many subsequently being validated by universities, necessitating ongoing periodic consultation between city science offices, policymakers, financial institutions and their counterparties in order for each to remain up to date.
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?
We note that resolving issues in multi-level governance requires specialist attention in regions, cities and urban democracies. To obtain sufficient granularity for operations to succeed both initially and in a scalable manner.
Different territories within a single jurisdiction have different levels and requirements for operational efficacy. A village may conclude that action A is pertinent to a resolution of an ESG-related issue. A regional authority may conclude that action B is pertinent and a national authority may conclude that action C is in fact required.
Granularity has to be defined in relation to and consultation with all layers of governance before financial institutions and their counterparties can appraise and monitor ESG risks accurately. For projects which have already been commissioned, a process of establishing granularity retrospectively may need to be established.
We note that consultation with cities, city science offices and universities may augment the granularity and quality of metricsand targets to be used in urban environments as part of the plans required by the CRD. To the extent that they may bestandardized and scaled across urban environments across the EU.
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?
We think that financial institutions and their counterparties would benefit from a common format for the plans required by the CRD.
To show the potential of a standardized method that combines both qualitative and quantitative data the City of Amsterdam developed the CitiesDAO working model with fully evidenced interoperability for collaboration between the public and private sectors in cities. Bringing qualitative ESG data in cities to quantitive ESG data and back to qualitative, from stories to measurement back to stories again.
CitiesDAO utilises Theory of Change and measures of trust as a qualifying factor of collaboration by using the YUPTA framework (Neverjan 2023), bringing specific configurations of time, space, action and relation into the process of societal impact measurement in ESG. Allowing for the translation of stories and peoples’ experiences into measurable, outputs, outcomes and impacts
Institutions and their counterparties can engage with CitiesDAO to appraise, monitor, assess and evidence their ESG risk practices in collaboration with cities, city residents, city authorities, businesses and industry in a scalable manner across multiple cities.
https://citiesdao.org
https://openresearch.amsterdam/en/page/95507/shaping-trust-essay
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.
We concur with the EBA's recognition that "The long-term nature and the profoundness of the transition process towards a climate-neutral and sustainable economy may entail significant changes in the business models of institutions and in the types and levels of risks they are confronted with"
Accordingly, we acknowledge that there are clear challenges in forming a multi-disciplinary approach to climate transition risk. Particularly one which includes salient points for prudential risk management to address in each and every response to the climate crisis.
The main challenge is the implantation of any of such guidelines, regulations, standards et cetera at local level are (especially for smaller cities): capacities, skills, resources, right strategy and often political and managerial leaderships.
Clarification on principles for establishing, utilising and monitoring the efficacy of evidenced based ESG risk metrics through proven scientific methodologies for urban environments would help us implement the EBA’s guidelines on ESG risk.
An ESG exploration with the City Science Initiative indicates that Social is Local for which reason cities and regions have a specific position in the merging ESG landscape.
Question 26: Do you have other comments on the draft guidelines?
ESG frameworks lack a clear link between investors' project portfolios and the local community and local democracy. This hinders meaningful impact and alignment with community needs and urban and regional challenges. Despite the growingrecognition of ESG principles, a disconnect currently most often remains between investment initiatives and the communities they serve.
Achieving meaningful impact requires fostering closer ties between investors and local stakeholders, ensuring that projects address genuine needs and contribute to sustainable development. Furthermore, achieving a balance between inclusivity and participation is paramount. ESG initiatives must strive to engage diverse socio-economic strata, ensuring that all voices areheard and represented. However, the fragmented nature of governance, as exemplified by competing ministries responsible for social housing, poses a significant challenge.
While collaboration can foster innovation, it also risks creating bureaucratic bottlenecks that impede progress. The perceptionof investment values and incentives also plays a crucial role in driving ESG impact.
By embracing and prioritizing transparent communication, mutual understanding, and ongoing collaboration, stakeholders canchart a course towards building trust and effectively addressing prudential management in the complex societal challenges stemming from climate transition risk.
Through concerted efforts and unwavering commitment to shared environmental and social impact, trust can serve as thebedrock upon which transformative change is built.