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?
Comment made in relation to Question 1 (general approach), Question 14 (ESG risks in ICAAP and ILAAP), Question 15 (credit policies and procedures), Question 17 (monitoring), Question 18 (guidelines for plans).
Importance of enhancing public disclosures
Given the importance of long-term sustainability risks, such as risks related to climate change, Scope Ratings believes that transparency requirements and information shared in the public domain under the draft guidelines could be enhanced, in particular when it comes to assumptions (e.g. scenario-based analysis) specific risk indicators or metrics (e.g. indicators mentioned in paragraph 72 or metrics listed in paragraph 94) and how they can be articulated with non-prudential disclosures. Enhanced public disclosures would support effective oversight.
The proposed approach considers integrating ESG risk related sections into ILAAP and ICAAP reports. However, access to ILAAP and ICAAP reports are de facto restricted. There is no indication in the draft guidelines that transparency in the market would be enhanced, including with regards to plans.
Institutions could be required to publish a minimum set of key findings. The proposed risk management framework may also contribute to feed Pillar 3 disclosures on ESG risks. The EBA may consider publishing additional data in the form of regular publications (risk dashboards) or add ESG risk related sections to the existing periodic transparency exercises.
Comment made in relation to Question 1 (general approach), Question 4 (materiality assessment and use of the EU taxonomy as a proxy), and Question 9 (portfolio-alignment methodologies and reference to the IAE net zero scenario).
Reducing financial institutions’ exposure to policy risks
Scope Ratings acknowledges that the incorporation of ESG risks into prudential frameworks is a pioneering, critical and decisive step forward, which will materially improve risk management practices.
In the meantime, this approach also increases financial institutions’ exposure to policy risks. Policy objectives may vary over time and across jurisdictions. Fostering the adoption of an international level-playing field in this area remains highly desirable.
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.
Comment made in relation to Question 3 (variety of factors under consideration), Question 5 (scope of the materiality assessment), and Question 16 (market, liquidity and funding, operational, reputational and concentration risks).
Importance of adopting an all-encompassing approach for ESG risk management
Given all the ongoing global initiatives, including in the EU, to refine and enhance analytical frameworks and disclosure on all ESG factors, Scope Ratings believes that a reduction of the scope of application of this prudential framework does not appear desirable.
The agency would like to highlight the need to continue to refine the approach regarding lending and other business activities but also expand the integration of ESG considerations in relation to funding issues, which could be further detailed in the guidelines (e.g. in paragraph 65), for instance by source of funding, and potentially more prescriptive (e.g. in paragraph 79).
Question 4: Do you have comments on the materiality assessment to be performed by institutions?
Please see second part of the answer to question 1 above (on the importance of managing policy risks).
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.
Please see answer to question 3 above (shared comment on the importance of an all-encompassing approach).
Question 6: Do you have comments on the data processes that institutions should have in place with regard to ESG risks?
Comment made in relation to Question 6 (data processes), and Question 8 (exposure-based methodology).
Limiting the possibility to address risk management considerations with qualitative statements only.
Scope Ratings understands the need to balance quantitative and qualitative approaches for the identification and measurement of ESG risks.
In the meantime, the Agency believes that the possibility to rely on qualitative approaches to address risk management considerations could be further limited, given progress made with the identification of relevant ESG-related indicators and metrics, including for factors which are qualitative in essence, for example governance. Hence, for instance, the list provided in paragraph 23 could be amended to avoid the reference to generic statements such as ‘ii. Governance practices’, and point to more specific frameworks.
Question 8: Do you have comments on the exposure-based methodology?
Please see answer to question 6 above (on limiting the possibility to address risk management considerations with qualitative statements only).
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.
Please see second part of the answer to question 1 above (on the importance of managing policy risks).
Question 14: Do you have comments on section 5.5 – consideration of ESG risks in ICAAP and ILAAP?
Please see first part of the answer to question 1 above (shared comment on public disclosures).
Question 15: Do you have comments on section 5.6 – consideration of ESG risks in credit risk policies and procedures?
Please see first part of the answer to question 1 above (shared comment on public disclosures).
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?
Please see answer to question 3 above (shared comment on the importance of an all-encompassing approach).
Question 17: Do you have comments on section 5.8 – monitoring of ESG risks?
Please see first part of the answer to question 1 above (shared comment on public disclosures).
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?
Please see first part of the answer to question 1 above (shared comment on public disclosures).