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?
Paragraph 26. states “On the environmental and social materiality side, the economic and financial activities of counterparties or invested assets can have a negative impact on environmental and social factors, which could in turn translate into financial impact on the institution. The assessment and management of environmental and social risks should take both of these dimensions into account to the extent that they affect the financial risks institutions are exposed to.” Here, the interweaving of other European legislation and the dual materiality is better explained than when the plans under CSRD – CSDDD and CRD/CRR are presented as separate matters in paragraph 13and 14
From a prudential point of view, it is important to ensure that the objective of CSRD transition plans is reflected in the level of risk identified at the level of the institution. These are in fact two sides of the same coin, as the CRD requires prudential transition plans to be compatible with transition plans prepared under the CSRD, which must be aligned with the EU's climate neutrality objective. It is important to insist on this point in order to avoid creating a double standard for CSRD/CSDDD transition plans on the one hand and prudential transition plans on the other.
14. These guidelines do not require CRD-based plans to set out an objective of fully aligning with Member States or Union sustainability objectives or one specific transition trajectory : Please add further to this sentence: “Although they need to be consistent with CSRD since Article 87a(5) subparagraph 2 of the CRD states that, where relevant, the methodologies and assumptions sustaining the targets, the commitments and the strategic decisions disclosed publicly by institutions under Directive 2013/34/EU, or other relevant disclosure and due diligence frameworks, shall be consistent with the criteria, methodologies, assumptions, and targets used in the plans to be prepared in accordance with the CRD.”
Furthermore, it should be emphasized that if a financial institution is subject to the preparation of transition plans within CSRD and CSDDD aimed at climate neutrality by 2050, the CRD plan should be consistent with this.
15. no exit or divestment from carbon intensive sectors: It is important to pay special attention to climate-relevant sectors, namely the sectors that contribute significantly to climate change, being Sections A to H and Section L of Annex I to Regulation (EC) No 1893/2006. It is advisable to include a note that continuing to finance/hold assets that undermine climate goals increases transition and physical risks.
Finally, the issue of integration with other plans remains: EFRAG and the Platform on Sustainable Finance are working on guidance to provide clarity on the different legal requirements with regard to transition plans. Financial institutions should be able to benefit from this ongoing work, meaning the work currently being done by EBA with its guidelines on the plan, should be integrated in EFRAG’s or PSF’s guidance on transition plans in order to ensure maximum coherence among the various guidelines. This coordinated approach will help in creating a consistent and comprehensive framework for transition planning across the financial sector, ensuring that guidelines from different regulatory bodies complement each other and provide clear, actionable guidance. (see also answer to question 24)
Question 2: Do you have comments on the proportionality approach taken by the EBA for these guidelines?
The effectiveness of the ESG risk assessment relies on the thoroughness of the materiality assessment; ideally, guidelines for this assessment shall be published, with appropriate oversight of the materiality assessment.
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.
Building on the response provided in question 1: 26. On the environmental and social materiality side, the economic and financial activities of counterparties or invested assets can have a negative impact on environmental and social factors, which could in turn translate into financial impact on the institution. The assessment and management of environmental and social risks should take both of these dimensions into account to the extent that they affect the financial risks institutions are exposed to.
The final sentence explicitly emphasizes the importance of consistency with transition plan requirements in CSRD, CSDDD, and CRD/CRR. It is crucial not only to highlight the differences between CRD/CRR and CSRD/CSDDD but rather to indicate how they complement each other. Here, they refer to both dimensions as 'two sides of the same coin'; it is important to recognize this when financing activities in climate-relevant sectors without transition outlook.
The various environmental crises feed into each other and are intertwined. Guidance and further research on considering these in risk management are highly welcomed. It is also important to note that there is no hierarchy between environmental and social objectives. An integral, cross-cutting approach is important, but climate is prioritized due to a phased approach.
Question 4: Do you have comments on the materiality assessment to be performed by institutions?
14.c) "The assessment of transition risk drivers should take into account changes in policies, technologies and market preferences, as well as the extent to which institutions’ most critical counterparties or, in the case of significant SME or real estate portfolios, average of counterparties may diverge from transition objectives of the jurisdictions where they operate; the assessment of physical risk drivers should take into account the level of both acute and chronic physical events associated with different transition pathways and climate scenarios”
Scenario analyses are valuable for both transition and physical risk assessment. For instance, assets within a mortgage portfolio may not fully comply with EU and national regulations/standards, potentially exposing financial institutions to transition risks. To evaluate these transition risks, scenario analysis should be conducted too. It’s a question of consistency along the regulation.
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.
16. we welcome the focus on sectors materially subject to environmental transition risks.
17. Using the taxonomy as a measure of non-materiality: We remain unconvinced that the taxonomy serves as the most suitable measure to justify non-materiality, particularly as it is applied at the sectoral level in this context. When referring to a 'high level of alignment,' clarity is needed in its definition. The taxonomy operates as a classification tool at the activity level, not at the sectoral level, allowing for the possibility that a company's overall activities may be 80% aligned and 20% non-aligned. This lack of alignment could stem from activities not meeting the criteria or from activities not covered by the taxonomy. Furthermore, the taxonomy excludes harmful activities, meaning that a company could achieve a high level of alignment for environmentally sustainable activities while simultaneously engaging in environmentally damaging activities. In this scenario, if the 'high level of alignment' to the taxonomy is used as a proxy, the company's ESG risk would not be fully considered. A possible solution would be to draw on the ESRS developed by EFRAG and used in the CSRD sustainability reporting framework and adapt them to the materiality assessment of financial institutions.
- Institutions should document as part of their ICAAP their ESG risks materiality assessments, including methodologies and thresholds used, inputs and factors considered and main results and conclusions reached.
Will national supervisory authorities publish guidelines on this matter? Or will this be done by the ECB?
Considering that the ECB will issue GLs in this area, while respecting the principle of proportionality at the level of national supervisory authorities, it is important to ensure a level playing field with a high level of alignment with the ECB's GLs.
Question 6: Do you have comments on the data processes that institutions should have in place with regard to ESG risks?
Links between reporting requirements of existing legislation should be made more explicit in the guidelines. For example, when assessing the risk profile of a counterparty, it's crucial to utilize information already provided through existing legislation. Moreover, since financial actors are often subject to the same legislation, they may already collect some data to comply with reporting requirements. However, there exists an overlap between the data required under existing legislation and the CRD. Thus, providing financial actors with a comprehensive overview of the data they should already collect under current legislations, along with additional data required for CRD compliance, is essential. This approach helps prevent double reporting burdens and facilitates legal compliance.
Additionally, financial institutions' exposure to ESG risks is exacerbated by their financing of activities that hinder ESG objectives.
Question 7: Do you have comments on the measurement and assessment principles?
28. Key risk indicators: how do those relate to the Principal Adverse Impact Indicators of SFDR?
Question 8: Do you have comments on the exposure-based methodology?
31.b: the degree of vulnerability to transition risk: This can be linked to the portfolio's exposure to climate-relevant sectors, where the counterparty's possession of a transition plan must also be taken into account.
33. speaks of the implementation of due diligence processes whereas the Corporate Sustainability Due Diligence Directive provides explicit legislation on this matter.
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.
Paragraph 36 states that : “measure the alignment of at least the following sectoral portfolios: power; fossil fuel combustion; automotive; aviation; maritime transport; cement, clinker and lime production; iron and steel, coke, and metal ore production, chemicals to the International Energy Agency (IEA) net zero emissions by 2050 scenario”
We would like to know why only these sectors are considered ? Elsewhere in the document, there is reference to broader climate-relevant sectors according to Annex I of 1893/2006, which are sections A to H and section L: agriculture, forestry and fishing; mining and quarrying; manufacturing; electricity, gas, steam and air conditioning supply; water supply, sewerage, waste management and remediation activities; construction; wholesale and retail trade, repair of motor vehicles and motorcycles; transportation and storage; real estate activities.
We are also curious about the exclusive reliance on the IEA scenario. It's worth noting that national authorities often publish their own scenarios, which might be more tailored to portfolios with a national focus, such as real estate. These national scenarios aligned with EU objectives could offer valuable insights and data that are more aligned with local market conditions and regulatory environments, potentially enhancing the accuracy and relevance of risk assessments for nationally anchored portfolios. Aside the use of more granular scenarios, for instance at national level, we also believe that some obligations set up at national level, such as renovation obligations, should also be taken into account by financial actors in assessing portfolio alignment because they might play a role from a prudential perspective. To enhance the accuracy and relevance of portfolio alignment assessments, financial actors should consider integrating national scenarios into their analytical frameworks alongside global ones like those provided by the IEA. This approach enables a more comprehensive assessment that accounts for the multifaceted nature of risk, especially in sectors like real estate that are heavily influenced by local factors. Additionally, acknowledging and incorporating specific national obligations and regulations into these assessments ensures that financial actors are better equipped to manage risks and capitalize on opportunities in alignment with local market dynamics and regulatory landscapes.
37. With regard to other (not climate-related) ESG factors, institutions should provide for additional methodologies at a portfolio-based level in their internal procedures. Why heat maps in particular? Floods seem to generate the most material damage in the EU.
38.b) approaches to measuring the positive or adverse impacts of their portfolios on the achievement of the UN Sustainable Development Goals and evaluating potential related financial risks.
- We have legislation regarding this? Why the reference to SDGs when we have principal adverse impacts within SFDR? Couldn't the Regulatory Technical Standards be used for this?
Question 10: Do you have comments on the ESG risks management principles?
The text mentions corporate counterparties' transition plans without referring to CSRD. Overall, the integration of European Stability Reporting Standards/Voluntary Sustainability Reporting Standards throughout the guidelines could be improved.
Question 11: Do you have comments on section 5.2 – consideration of ESG risks in strategies and business models?
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Question 12: Do you have comments on section 5.3 – consideration of ESG risks in risk appetite?
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Question 13: Do you have comments on section 5.4 – consideration of ESG risks in internal culture, capabilities and controls?
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Question 14: Do you have comments on section 5.5 – consideration of ESG risks in ICAAP and ILAAP?
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Question 15: Do you have comments on section 5.6 – consideration of ESG risks in credit risk policies and procedures?
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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?
68. … To identify ESG-related concentration risks, institutions should consider the size or shares of their exposures that may be affected by ESG risks relative to total exposures. Institutions should take into account several ESG criteria amongst which GHG emissions, sectoral vulnerabilities, vulnerability of geographical areas to physical risks, and social or governance deficiencies or controversies identified in jurisdictions where exposures are located. …
- link to existing legislation
Question 17: Do you have comments on section 5.8 – monitoring of ESG risks?
72.f) Ratios representing as part of the institution’s total exposures the share of environmentally sustainable exposures financing activities that contribute or enable the environmental objective of climate change mitigation referred to in Article 9 point (a) of Regulation (EU) 2020/852, and the share of carbon-intense exposures, based on clear and documented methodologies.
Why is the Green asset ratio not quoted here?
Instead of ‘carbon intense’, greenhouse gas intense would be better suited throughout the guidance. The methodology for greenhouse gas intense exposures should be linked to climate relevant sectors and the exposure to those, while taking into account the possession of a transition plan by the counterparty with the aim of reaching climate neutrality by 2050.
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?
We read that the plans should be "regularly" updated but we believe that there should be more precision regarding the frequency of the update with a clear timeline for updating the plans.
Question 19: Do you have comments on section 6.2 – governance of plans required by the CRD?
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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?
- Institutions should clearly define and justify which activities and business lines are covered by their targets
Why aren’t all activities and business lines covered?
- The targets set by institutions should serve risk management and strategic steering purposes with a view to mitigating 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.
The sustainability objectives of the European Union framework should be taken into account.
- c) Amount and/or share of income related to business with counterparties operating in sectors that highly contribute to climate change :
Inconsistent language, why not refer to climate-relevant sectors again?
Better consistency should be ensured between ESRS E1 (content of transition plan) of the CSRD and the indicators under prudential transition plans.
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?
Paragraph 98 states :“ The geographical reference and granularity of the scenarios and pathways used by institutions should be relevant to their business model and exposures.“
As mentioned above (cf. question 9), it's worth noting that national authorities often publish their own scenarios, which might be more tailored to portfolios with a national focus, such as real estate. These national scenarios in line with EU objectives could offer valuable insights and data that are more aligned with local market conditions and regulatory environments, potentially enhancing the accuracy and relevance of risk assessments for nationally anchored portfolios.
Question 22: Do you have comments on section 6.5 – transition planning?
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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?
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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?
A common template for the prudential transition plans with the minimal reporting requirements that must be included in such plans will be useful for the financial actors as well as for comparability purposes. This common template would serve as a standardized framework, ensuring that all relevant financial institutions adhere to a consistent set of criteria when reporting on their (prudential) transition strategies.
In addition, ensuring maximum consistency between the reporting elements required under the European Sustainability Reporting Standards (ESRS) E1-1, which pertains to the content of transition plans under the Corporate Sustainability Reporting Directive (CSRD), and those required under the prudential transition plan, is crucial. This alignment would significantly reduce the reporting burden on financial institutions by enabling them to leverage the same data and information across different reporting frameworks. A table of correspondence could be useful since it would provide a clear and concise reference that maps the requirements of the ESRS E1-1 to those of the prudential transition plans, highlighting areas of overlap and distinct requirements. In this matter, the work that is currently undertaken by EFRAG which is developing guidelines for the content of the transition plans under the CSRD is an important development to consider.
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.
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Question 26: Do you have other comments on the draft guidelines?
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