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?

N/A

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

Bloomberg supports the proportionality approach taken by the EBA in these guidelines. We recommend that non-public and SME-type institutions implement ESG risk management approaches that reflect their business model and scope of activities, and that are proportionate to the size, nature and complexity of their business. 

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.

Bloomberg agrees with the need for additional guidance. We would note that biodiversity risk represents a relatively novel field; for this reason, we believe institutions would benefit from additional guidance to distinguish between climate and nature risks, and between social and governance risks.  

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

Bloomberg largely supports the materiality assessment to be performed by institutions. However, we would note that institutions would benefit from greater clarity and guidance regarding the interoperability between the materiality assessment proposed by the EBA in these guidelines and the concept of double materiality enshrined in EU legislation. 

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.

Bloomberg supports a close level of alignment between the guidelines and EU legislation. To this end, we support using the EU Taxonomy as a proxy for supporting justification of non-materiality. We support introducing similar requirements for the materiality assessment of physical, social and governance risks to ensure consistency in the materiality assessment to be performed as per paragraphs 16 and 17.

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

Bloomberg supports the data processes put forward by the EBA in these guidelines. However, we note that the EBA guidelines, as currently drafted, refer to the “need to use services of third-party providers” as a last resort. Bloomberg recommends that institutions use third-party providers to gain access to data that is of better quality and more reliable. In other words, in our view institutions should take remediating actions only when data from counterparties, public sources or third-party providers is lacking.  

Furthermore, we note that it would be helpful to clearly define “adaptive capacity” in this context, as adaptation is typically used in the context of climate physical risk, but here seems to refer to company transition plans. These topics require different datasets, and further clarification could help avoid confusion.

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

N/A

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

N/A

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.

As stated in our response to Questions 17 and 20 below, Bloomberg recommends supplementing the climate portfolio alignment methodologies with the energy supply-banking ratio (ESBR).  ESBR is a ratio that compares the underwriting activity of banks in two sectors: low-carbon and fossil-fuel energy. It can be used to monitor the alignment of a bank with an investment trajectory that meets the Paris Agreement.

BloombergNEF publishes the following analysis of the ESBR on an annual basis: https://assets.bbhub.io/professional/sites/24/Financing-the-Transition_Energy-Supply-Investment-and-Bank-Facilitated-Financing-Ratios.pdf.

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

We support the EBA’s recommendations in this section. However, we would note that the Network for Greening the Financial System (NGFS) scenarios tend to be longer term (e.g. out to 2050 or beyond) than the 10-year time horizon that the EBA puts forward in its guidelines. We would encourage the EBA to consider a longer time horizon to capture the longer-term physical effects of climate change.

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

As highlighted in Question 10, we support the EBA’s recommendations in this section. However, we would note that the Network for Greening the Financial System (NGFS) scenarios tend to be longer term (e.g. out to 2050 or beyond) than the 10-year time horizon that the EBA puts forward in its guidelines. We would encourage the EBA to consider a longer time horizon to capture the longer-term physical effects of climate change. 

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

See our response to Questions 17 and 20 below. 

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

N/A

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

N/A

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

N/A

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?

N/A

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

Bloomberg supports the existing list of backward and forward-looking ESG risk metrics and indicators included in Section 5.8 of the EBA guidelines. However, we would recommend supplementing it with low carbon CapEx as an indicator and the energy supply- banking ratio (ESBR). ESBR is a ratio that compares the underwriting activity of banks in two sectors: low-carbon and fossil-fuel energy. It can be used to monitor the alignment of a bank with an investment trajectory that meets the Paris Agreement. 

BloombergNEF publishes the following analysis of the ESBR on an annual basis: https://assets.bbhub.io/professional/sites/24/Financing-the-Transition_Energy-Supply-Investment-and-Bank-Facilitated-Financing-Ratios.pdf.

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?

N/A

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

N/A

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?

Similarly to Question 17 above, Bloomberg supports the existing list of ESG metrics and targets, but would recommend supplementing it with low carbon CapEx as an indicator and the energy supply-banking ratio (ESBR). ESBR is a ratio that compares the underwriting activity of banks in two sectors: low-carbon and fossil-fuel energy. It can be used to monitor the alignment of a bank with an investment trajectory that meets the Paris Agreement. 

BloombergNEF publishes the following analysis of the ESBR on an annual basis: https://assets.bbhub.io/professional/sites/24/Financing-the-Transition_Energy-Supply-Investment-and-Bank-Facilitated-Financing-Ratios.pdf.

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?

N/A

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

N/A

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?

Bloomberg believes the guidelines provide the right level of granularity at this stage. 

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?

N/A

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.

N/A

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

N/A

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