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?

About the TPT Secretariat

In April 2022, the Transition Plan Taskforce (TPT) was launched with a mandate to convene the market and develop a suite of recommendations and guidance on good practice private sector transition plans across financial and non-financial sectors, in the context of a pledged requirement by the UK government to require disclosure of corporate transition plans by listed companies and financial firms. The TPT is Co-Chaired by Aviva (the insurance firm) and by HM Treasury (the UK Finance Ministry) and includes members from the public, private and non-profit sectors. The Bank of England and the Monetary Authority of Singapore are Observers to the TPT. 

In October 2023, the TPT published the TPT Disclosure Framework, setting out core recommendations for robust and credible transition plan disclosures. Additional outputs include sector-neutral implementation guidance, high-level sector-specific recommendations on levers, metrics & targets covering 30 industries, seven sector ‘deep dives’ covering both financial and real economy industries, as well as advisory papers developed by TPT Working Groups on Nature, Adaptation, Just Transition & SMEs. 

The Secretariat for the TPT is jointly provided by Third Generation Environmentalism (E3G) and by the Centre for Greening Finance & Investment (CGFI). In supporting this work, the TPT Secretariat has been engaging on the topic of transition plans with regulators, civil society, academia, and practitioners from both the real economy and financial institutions around the world for the past two years. 

Given the relevance of that work to the proposed EBA Guidelines on the management of ESG-related risks and opportunities, E3G and CGFI in their capacity as the TPT Secretariat (“we”) would like to take the opportunity to share reflections on the proposed guidance. This response is submitted by the TPT Secretariat and does not necessarily represent the views of TPT Steering Group members. Where “the TPT” is referred to in this response, it refers to the views of the TPT Steering Group as set out in published TPT documents.

The global conversation on transition plans

In the background and rationale to the Guidelines (Par. 11-19), the EBA mentions that its work is taking place in the context of simultaneous EU regulatory processes relating to the development and disclosure by private sector firms of climate transition plans. EBA refers to two relevant EU Directives: the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). In addition, there are ongoing discussions about the role of transition plans in the insurance sector, in the context of amendments to the Solvency II Directive. 

In addition to these various developments within the EU regulatory agenda, we note that the EBA is also developing its Guidelines in the context of international and multilateral discussions related to private sector transition plans and that the EU is an active participant in many of the relevant forums.

In the voluntary space, we have seen investor coalitions, such as the Glasgow Financial Alliance for Net Zero, Climate Action 100+, and the Institutional Investor Group on Climate Change, outline investor expectations on climate transition plans. Similarly, non-governmental organisations such as CDP – a voluntary disclosure framework very widely used by EU firms - have put forward principles of what a credible climate transition plan is. 

Transition Plans are also being discussed as part of mandatory requirements across different multilateral forums and in a variety of non-EU jurisdictions. The International Sustainability Standards Board (ISSB) referenced transition plans in the finalised IFRS S2 Climate-related Disclosure Standard, which sets out disclosure requirements about entities’ climate-related risks and opportunities. Many countries are now in the process of adopting ISSB Standards into domestic regulation. In addition, there is a growing list of individual jurisdictions in which policymakers and regulators are exploring the introduction of rules, requirements or guidelines related to transition plans, including Australia, Hong Kong, Japan, New Zealand, Singapore, Thailand, and the United States. 

General reflections

Over the past two years, the TPT Secretariat has actively engaged with many of these actors as well as practitioners to support the development of common international norms which will help firms – many of which are working across multiple geographies - to navigate this complex landscape and to articulate credible and robust transition plans.

From our experiences we are happy to share the following learnings, which we recommend the EBA keeps in mind as they finalise their Draft Guidelines: 

• It is helpful to distinguish between the process of transition planning and the disclosure of a static (but periodically updated) transition plans, as elaborated by the NGFS in its Stocktake on Financial Institution’s Transition Plans (NGFS, 2023).
• Regardless of the sector (whether banking, insurance, another financial sub-sector, or a real economy sector), a company’s climate transition plan is part of its business strategy. A climate transition plan is a forward-looking articulation of how the firm plans to navigate the complexities of a climate transition that can be expected to be deeply disruptive and uncertain. 
• In developing and articulating their transition plans, companies will need to take into account a variety of internal and external users that will all have an interest in understanding how the firm is approaching this transition. For the firm itself, the plan is a strategic tool that can help the firm manage risks and make strategic decisions over time. Potential users for a transition plan may include, for example:
  • internal management teams that are using the strategy to communicate and oversee the business transformation; 
  • shareholders who may be interested in the firm’s ability to protect and generate value over the short-, medium-or long-term; 
  • lenders or insurers who may be interested in whether the company is sufficiently resilient to the expected physical and transition risks it faces;
  • policymakers who may be seeking to understand whether and how the firm is making its business model compatible with national and sectoral climate goals and policies;
  • market conduct regulators who may want to understand whether a firm is completely and accurately stating the ESG credentials of products and services it offers; and
  • prudential regulators who may be interested in whether a firm is understanding, assessing and managing the risks stemming from its activities and exposures in relation to the climate transition. 
• These different users may place differing, and potentially at times conflicting, demands on what the company should prioritise within its climate transition plan and overall business strategy. The role of company leadership is to take these into account as part of their transition planning process, and then make balanced decisions on the right way forward. Ultimately, however, they will need to decide on a single business strategy and within this a single forward-looking climate transition plan that guides their decision-making and actions, i.e. one plan, for many users.
• Precisely because of this multitude of possible climate transition plan uses cases, the TPT recommends that entities should take a ‘strategic and rounded approach’ to transition planning, taking into account three inter-related channels for action (i) decarbonising across Scopes 1,2 and 3; (ii) responding to risks and opportunities (both physical and transition), and (iii) contributing to the economy-wide transition towards a low-GHG emissions and climate-resilient economy. This approach recognises that any firm may face both synergies and trade-offs between these channels, and the TPT encourages company leadership to take these trade-offs into account when developing their climate transition plan.

Overall recommendations on the EBA Draft Guidelines

Overall, the TPT Secretariat strongly welcomes the EBA’s leadership on setting out clear expectations on the management of ESG and climate-related risks. It is particularly encouraging to see that the Draft Guidelines explicitly recognise the role that climate transition plans can play in ensuring financial institutions are appropriately addressing the ESG-related risks and opportunities that they face, and that they are taking steps today to set themselves up for success tomorrow. 

We also believe that there are several ways in which the proposed guidelines could be further clarified or strengthened, as outlined below.

• We agree with the EBA’s observation that, for the objective of ensuring robust management, it is important that financial institutions approach the exercise of transition planning in a way that ensures that they appropriately “understand, assess and manage the risks stemming from their activities and exposures in view of the process of adjustment towards the regulatory sustainability objectives of the jurisdiction they operate in, or broader transition trends towards a sustainable economy”. 
• Equally, we agree that the transition plans of financial institutions will need to articulate how the firm plans to “identify, measure, manage and monitor ESG risks” going forward, as part of its strategic response to the transition. 
• However, we disagree with the distinction drawn in Par.11-19 of the EBA Draft Guidelines between non-prudential and prudential transition plans. Instead, we recommend that financial institutions (as well as non-financial firms) develop a single climate transition plan, that takes into account both prudential and non-prudential objectives, requirements and use cases. This also reflects the evolving thinking in other forums, for example Jean Boissinot’s (NGFS/BdF) recent call for “one (single, multipurpose, consistent) transition plan to rule them all” (Boissinot, 2024)
• We recommend an alternative framing, which is that the EBA should position its Guidelines as setting out specific prudential requirements and expectations that financial institutions should follow as part of their overarching transition planning process and in the resulting (single, multipurpose, consistent) transition plan. In articulating these requirements and expectations, the EBA could draw on the existing work of academics and initiatives that have contributed to our understanding of the prudential use case of transition plans (see e.g. Dikau et al., 2022; I4CE, 2024, NGFS, 2024). Ultimately, however, the Guidelines should enable institutions to develop a single transition plan which meets the needs of prudential users as well as others (e.g. investors, market conduct regulators, civil society etc.).

This recommendation is based on the TPT Secretariat’s extensive engagement with global financial institutions over two years regarding how transition plan requirements can be streamlined whilst remaining highly impactful and beneficial. Our recommended approach has numerous benefits, including:

• supporting financial firms to have a single coherent approach to climate transition within their overall business strategy;
• avoiding the risk of confusing transition plan preparers on whether they need to develop a single, or multiple, climate transition plans for different types of regulator, and thereby reducing policy uncertainty and business burden;
• reducing industry opposition to transition planning in general by simplifying regulatory requirements and presenting them as being consistent across regulators;
• helping to ensure that climate transition planning becomes a strategic decision and risk management tool for firms, as opposed to purely a compliance exercise;
• preventing fragmentation of transition plan disclosure approaches, helping to support overall completeness and consistency of market information and to build market-wide support for transition plans;
• providing a leadership example to other jurisdictions grappling with similar issues, for how the prudential and non-prudential conversations on transition plans can be bridged, and enabling the EU to play this leadership role in multilateral forums such as the Financial Stability Board and Network for Greening the Financial System.

References

Boissinot J (2024) Transition planning in the financial sector, VIEWS - The Eurofi Magazine, 2024 p.188). https://www.eurofi.net/wp-content/uploads/2024/02/views-the-eurofi-magazine_ghent_february-2024.pdf

Institute for Climate Economics [I4CE] (2024) Prudential transition plans: what’s next after the adoption of the Capital Requirements Directive. Paris: I4CE. https://www.i4ce.org/wp-content/uploads/2024/01/Prudential-transition-plans-whats-next-after-the-adoption-of-the-Capital-Requirements-Directive.pdf

Network for Greening the Financial System [NGFS] (2023) Stocktake on financial institutions: transition plans and their relevance to micro-prudential authorities. Paris: NGFS. www.ngfs.net/sites/default/files/stocktake_on_financial_institutions_transition_plans.pdf

Network for Greening the Financial System [NGFS] (2024) Credible Transition Plans: The micro-prudential perspective. Paris: NGFS. https://www.ngfs.net/sites/default/files/media/2024/04/17/ngfs_credible_transition_plans.pdf

Dikau S, Robins N, Smoleńska A, van ’t Klooster J and Volz U (2022) Net zero transition plans: a supervisory playbook for prudential authorities. London: Grantham Research Institute on Climate Change and the Environment and Centre for Climate Change Economics and Policy, London School of Economics and Political Science. www.lse.ac.uk/granthaminstitute/wp-content/uploads/2022/11/Net-zero-transition-plans-a-supervisory-playbook-for-prudential-authorities.pdf

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

General reflections
A point of feedback frequently received by the TPT Secretariat from firms has been that as the management of ESG becomes more central to company strategy, it increasingly makes sense to integrate ESG-related factors into existing business governance structures and processes around risk management, strategy development, financial planning etc. We therefore strongly agree with the general approach taken in the Draft Guidelines on integrating ESG risks into existing, institution-wide risk management frameworks. 

We are supportive of the proposed guidance in Par 42 on the risk management and risk mitigation tools available to institutions. 

Specific Recommendations

- Revisit and streamline the qualifiers in Par 42.a:

With respect to Par 42.a on counterparty engagement, we note that the Draft Guidelines include various qualifiers to describe the scope of counterparties that should be covered by particular engagement activities (e.g. ’most important’, ‘most critical, ‘large corporate’, ‘large counterparties’). 

The TPT deliberated similar qualifiers when developing its guidance on firms’ engagement strategy in relation to climate transition plans, both in developing its sector-neutral Disclosure Framework and in the drafting of ‘deep dive’ sectoral guidance (including ‘deep dive’ guidance for Banks (TPT, 2023; TPT, 2024a). The TPT Framework recognises that a balance needs to be struck between encouraging institutions to meaningfully engage with counterparties who are most relevant to the management and mitigation of ESG risks, and avoiding creating an overburdening obligation to demonstrate engagement with every possible counterparty.

A key learning in relation to striking this balance was that prioritisation of stakeholders is vital. However, the group of ‘relevant’ or ‘priority’ counterparties can vary widely across financial institutions, depending e.g. on the business model of the firm, the sectors it provides financing to, or the geographic location of the counterparties. In addition, it may make sense for an institution to evolve its stakeholder prioritisation over time (e.g. because the risk profile of certain counterparties changes over time, or because the financial institution reduces its exposure to certain counterparties as part of its plan and/or in response to perceived risks). Importantly, the size of a counterparty may not necessarily be a reliable proxy of whether engagement with that counterparty should be prioritised, as size may not be a good indicator of the extent of that counterparties’ relevance to the ESG-risk exposure of the financial institution and/or the success of its transition plan. In some cases, the financial exposure to a given counterparty may be more relevant.

For these reasons among others, the TPT has not specified criteria for which counterparties a financial institution should engage with. Instead, the approach under “Engagement Strategy” has been to ask entities to articulate howthey are prioritising engagement activities, and providing further guidance on possible criteria that entities may find relevant in supplementary materials (See 3.1 Engagement with value chain in the TPT’s “Explore Disclosure Recommendations” guidance) (TPT, 2024b). We recommend that the EBA take these considerations into account when deciding whether and how to prescribe the prioritisation of engagement with certain counterparties.

References

Transition Plan Taskforce [TPT] (2023) TPT Disclosure Framework. London: TPT. https://transitiontaskforce.net/disclosure-framework/

Transition Plan Taskforce [TPT] (2024a) Banks Sector Guidance. London: TPT. https://transitiontaskforce.net/wp-content/uploads/2024/04/Banks.pdf

Transition Plan Taskforce [TPT] (2024b) Explore the Disclosure Recommendations. London: TPT. https://transitiontaskforce.net/explore-the-recommendations/

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

We strongly support the inclusion of the proposed guidance on culture, capabilities and controls within the scope of the EBA Draft Guidelines. A key theme of practitioner feedback to the TPT Secretariat over the past two years has been that these all play a critical role in ensuring that companies are able to respond effectively to ESG risks, including by developing and implementing robust and credible transition plans. In particular, we see it as a key strength that the guidance: 

• takes the approach of integrating ESG risks into existing governance systems (including the three lines of defence) as opposed to proposing separate, ESG-specific structures. This aligns well with the need to bring the robust management of ESG risks into standard business practice, and with the approach taken by the TPT. 
• explicitly recognises the importance of the ‘tone from the top’ (Par. 50) which, in conversations between the TPT Secretariat and leading companies whose transition planning practices are more mature than the majority of the market, has repeatedly been flagged as a key success factor in securing organisational support for integrating climate transition planning into business strategy.

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

General reflections:

We strongly agree with the proposed guidance, particularly Par 72.e relating to monitoring engagement efforts, results & outcomes.

Specific Recommendations

-  Encourage firms to tie engagements to clear overarching objectives

In addition, the TPT Secretariat recommends that the EBA Guidance makes it explicit that entities should clearly document the objectives that they pursue in their particular engagements, and how these relate to overarching ESG risk mitigation objectives of the entity. This can help ensure that institutions conduct purposeful engagements and prioritise those engagements that are likely to make a sizable and relevant contribution to overarching goals. 

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?

General reflections:

Overall, the TPT Secretariat agrees with the proposed key principles included in the Draft Guidelines. In particular, we see the explicit recognition of the importance of ensuring medium- and long-term objectives are consistent with short-term financial metrics and targets (Par. 76-77), the need to ensure that transition plans are consistent with other processes and communications (Par. 78-80), and the need to document underlying criterial, methodologies, assumptions and targets used, as key strengths of the proposed draft. 

Specific Recommendations

-  Remove reference to prudential plans

In line with our overarching comments above, we recommend that the EBA drops the reference to “prudential plans” in the headline of Section 6.1.iii, to avoid implying that institutions will need to create, and integrate into their business strategy, more than one climate transition plan. In addition, we recommend that in this section, the EBA further explicitly recognises that plans developed under EBA Guidelines should be substantially identical to the climate transition plans to be developed and/or disclosed by the firms in response to requirements under CSDDD and CSRD and that although firms should develop responses to the needs of different regulators including EBA these responses should be expressed within a single firm-level climate transition plan which forms part of business strategy.

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

General reflections:

Overall, the TPT Secretariat agrees with the proposed guidance on the governance of transition plans included in the Draft Guidelines, which aligns well with the guidance provided in the TPT Transition Planning Cycle guidance (TPT, 2024c). In particular, we see the EBA’s emphasis on the need for clearly identified roles and responsibilities, the steer that the management body has responsibility for overseeing the transition plan (Par. 84-85), and the emphasis on the need for internal engagements at all levels of the organisation (Par. 87) as key strengths of the proposed text. 

References

Transition Plan Taskforce [TPT] (2024c) TPT Transition Planning Cycle. London: TPT. https://transitiontaskforce.net/the-transition-planning-cycle/  

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?

General reflections:

Meaningful ESG-risk management practices will require financial institutions to use a dashboard of metrics and targets that goes beyond the use of targets related to GHG emissions. It is therefore encouraging to see a breadth of indicators suggested under Par. 94 & 96. 

Specific Recommendations

The TPT Secretariat recommends that the EBA: 

• Par. 89: asks institutions to ensure that metrics and targets cover the entire business portfolio, including all activities and jurisdictions. Importantly, this should include metrics and targets related to any capital market facilitation activities that an entity may undertake. For many banks these activities form a material part of overall business activities and represent an important opportunity to engage with companies on their ESG-related objectives and transition plans.
• Par. 90: clarifies that the institution should set not only targets relating to risks stemming from the process of adjustments towards sustainability objectives, but also targets related to physical risks arising from the physical impacts of the changing climate. 
• Par. 94: includes at least one indicator related to the mitigation of physical risks and resilience. The EBA may find the resources developed by the Global Resilience Index Initiative (GRII, 2023) and the Climate Financial Risk Forum (CFRF, 2023) useful to support the development of guidance on this point. For example, the CFRF recommends that financial institutions monitor the exposure to assets vulnerable to acute and chronic physical risk. For banks this could mean monitoring the risk profile of clients as a whole or, in the case of asset-linked financing (e.g. mortgages, asset/project-financing), of the specific physical assets that they are exposed to. 
• Par. 94.e: separates the current guidance into two distinct indicators, the first focusing on monitoring the engagement activities of the institution, the other focusing on monitoring the performance of counterparties. The underlying rationale for this recommendation is that the TPT received very strong feedback from practitioners in financial institutions that it can be difficult to establish a clear causal links between any engagement activities undertaken, and changes in commitments and actions taken by counterparties. It was further flagged that claims of causality could in many instances become misleading as changes in counterparty behaviour will often be the result of multiple factors incl. e.g. competitive dynamics, collective pressure from multiple investors, regulatory changes or changes in leadership. The TPT guidance navigates this challenge by drawing a distinction between indicators relating to the engagement activity, and indicators relating to the climate performance of suppliers or counterparties. For example, an institution could separately monitor its own engagement activities, as well as the number or proportion of clients that have set GHG emissions reduction targets, developed transition plans that meet certain quality criteria etc. This would also help ensure that the institution monitors changes in counterparty behaviour that occur irrespective of their own engagement activities which will have an impact on the risk exposure of the institution.
• Par. 96: includes a further bullet point to encourage institutions to set any further metrics and targets related to the execution of the plan. As with any other strategies, institutions may use a wide range of key performance indicators (KPIs) to monitor the successful implementation of the plan, in addition to the outcome focused KPIs included under Par. 94 & 96. These could include indicators related to remuneration (e.g. proportion of individuals with remuneration linked to transition plan progress) or training (e.g. percentage of staff receiving transition plan-related training). Whilst this is not an area where we’d recommend a high degree of prescriptiveness (relevant targets will vary widely across firms) we believe it would be helpful for the EBA to encourage institutions to also consider setting indicators related to the execution of the plan, as these can provide an early warning of where readjustments may be needed over time.

References

Climate Financial Risk Forum [CFRF] (2023) Climate Disclosures Dashboard 2.0. CFRF https://www.fca.org.uk/publication/corporate/cfrf-guide-2023-climate-disclosures-dashboard.pdf

Global Resilience Index Initiative [GRII] (2023) Aligning finance with adaptation and resilience goals – Targets and Metrics for financial institutions: Technical Note. Oxford: UK Centre for Green Finance & Investment. https://www.cgfi.ac.uk/2023/06/aligning-finance-with-adaptation-and-resilience-goals-targets-and-metrics-for-financial-institutions-technical-note/

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

General reflections:

Overall, we agree with the guidance provided in section 6.5 transition planning.

Specific Recommendations

- Revisit the structure of this section, in particularly the heading “Transition Planning”

We would recommend re-thinking the overall structure of the guidance in this section for further clarity. In particular, the heading “Transition Planning” for section 6.5 creates the inaccurate impression that that Sections 6.1 – 6.4 are not related to transition planning activities. This is not correct. For example, identifying and allocating responsibilities for the development, implementation, and monitoring of plans (Par. 85) is clearly a step of the transition planning journey. The current section labelling also does not align well with the useful distinction drawn between transition planning and a transition plan in other forums (see e.g. NGFS, 2023). 

We would argue that concepts developed in existing guidance can be leveraged in this context. The TPT has based the Disclosure Framework on 5 Elements: Foundations, Implementation Strategy, Engagement Strategy, Metrics and Targets, and Governance. These are identical to the 5 transition plan themes identified by the Glasgow Financial Alliance for Net Zero in its voluntary guidance for financial institutions and real economy firms (GFANZ, 2023a; GFANZ, 2023b). In our experience, these elements provide a useful overall structure that can be easily communicated to practitioners and supplemented with further detailed and granular guidance. 

This structure, and particularly the concepts of Implementation Strategy and Engagement Strategy could also be used by the EBA in this part of the Guidance to strengthen clarity and avoid confusion. We believe it would be possible to restructure the guidance provided under section 6.5 along these headings, without any changes to the underlying requirements. Specifically,

• Par. 101, 103, 104 & 105 all describe activities which are captured under the Implementation Strategy elements of both the GFANZ and TPT guidance (with the exception of the reference to counterparty engagement under Par. 101).
• Par. 103, on the other hand, relates to the element Engagement Strategy of both the GFANZ and TPT guidance.

Making this change would have the major additional benefit to EBA of providing a visible signal of growing international consistency in the language used around transition plans, reducing potential preparer confusion and aversion to incoming requirements. 

References

Glasgow Financial Alliance for Net Zero [GFANZ] (2023 a) Recommendations and Guidance on Financial Institution Net-zero Transition Plans. GFANZ. https://assets.bbhub.io/company/sites/63/2022/09/Recommendations-and-Guidance-on-Financial-Institution-Net-zero-Transition-Plans-November-2022.pdf

Glasgow Financial Alliance for Net Zero [GFANZ] (2023 b) Expectations for Real-economy Transition Plans. GFANZ. https://assets.bbhub.io/company/sites/63/2022/09/Expectations-for-Real-economy-Transition-Plans-September-2022.pdf

Network for Greening the Financial System [NGFS] (2023) Stocktake on financial institutions: transition plans and their relevance to micro-prudential authorities. Paris: NGFS. www.ngfs.net/sites/default/files/stocktake_on_financial_institutions_transition_plans.pdf

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

Thank you for the opportunity to provide comments. We welcome further exchange with the EBA on any of the topics raised above. For any follow-up questions, please contact secretariat@transitiontaskforce.net.  

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