Response to consultation on Guidelines on ESG scenario analysis
Question 1: Do you have any comments on the interplay between these Guidelines and the Guidelines on the management of ESG risks?
The guidelines specify the requirements and definitions for CST and CRA. However, the connection between these Guidelines and the Guidelines on the management of ESG risks remains unclear. It would be beneficial to provide guidance on the following areas:
- Clarify the connection between ESG scenarios and the CRD transition plan. Specifically detailing how the results of ESG-related scenario analyses, including stress testing, should be integrated into the CRD transition strategy.
- The ESG risk management guideline GL 48b mentions environmental risk scenario analysis, while this guidance starts with climate. Additional details regarding the timelines and expectations for integrating broader environmental risks into scenario analysis would be helpful.
Question 2: Do you have comments on the proposed definition of scenario analysis and its various uses as presented in Figure 1?
No comment
Question 3: Do you have comments on the proposed distinction made between short-term scenario analysis (CST) and longer-term scenario analysis (CRA) as illustrated in Figure 3?
The distinctions between CST and CRA are generally clear; however, some areas require clarification. Notably, ESG-related stress testing for non-financial risks, such as operational, litigation, and greenwashing risks, is not addressed. Additionally, the recommended scenarios and variables for these assessments are absent. Providing guidance or best practice examples on these topics would be highly valuable.
Question 4: Do you have any comments on the interplay between these Guidelines and the Guidelines on institution’s stress testing?
No comment
Question 5: Do you have comments on the Climate Scenario Analysis framework as illustrated in Figure 4?
No comment
Question 6: While respecting the definitions provided in other parts of the regulation, is there any concept/s used in these guidelines that it would be useful to include in an annexed glossary?
To facilitate better understanding of the guidelines, we suggest adding the following definitions in an annexed glossary:
- Small and Non-Complex institutions (SNCI)
- Proportionality principles in term of institution's size, nature and complexity of activities
Question 7: Do you have comments on section 4.1 Purpose and governance?
Paragraph 16 indicates that institutions should progressively develop and implement scenario analysis, aiming to integrate it into the entire management system. However, the timeline for this gradual implementation remains vague. We recommend that the EBA provide clarification on what "gradual" entails, as financial institutions would benefit from a more defined timeline for fulfilling these requirements.
Question 8: Do you agree that the proposed proportionality approach is commensurate with both the maturity of the topic and the size, nature and complexity of the institution’ s activities?
We recognize the benefits of the proposed approach; however, we believe that clearer guidelines on certain topics would be beneficial. Specifically, we seek clarity on the EBA’s expectations for “frequency and scope” as outlined in paragraph 25, particularly concerning proportionality, as well as on the criteria for assessing proportionality based on institutional characteristics.
Question 9: Do you agree with the proposed references to organisations in paragraph 28? Would you suggest alternative or complementary references?
We agree with the proposed references to organisations in paragraph 28, as they provide a solid foundation for guiding institutions in setting credible scenarios. However, we would also suggest that references to sector-specific scenarios would be useful. For example, banks who lend on real estate often use established decarbonization pathways, such as CRREM country level Paris-aligned scenarios, for investigating transition risks.
Question 10: Do you have additional comments on section 5.1 Setting climate scenarios?
The guidance lacks clarity on whether institutions should integrate their publicly stated climate targets and commitments into their transition risk scenarios, and further clarification on this issue would be beneficial. Additionally, we seek clarification on the following points:
- Should the baseline and central scenarios be aligned for overlapping time periods (e.g., short/medium term)?
- Paragraph 36 highlights the need for institutions to focus on vulnerabilities related to physical risk, linking hazards to exposure locations and considering counterparties' vulnerabilities in sectors such as agriculture and energy, along with dependencies in customers' value chains and global supply chains. However, measuring and quantifying these supply chain risks is challenging. Is there guidance on how to address this?
- As mentioned in response to Question 1, the Guidelines identify climate as a starting point for environmental risk scenario analysis. Will the EBA provide guidance on incorporating non-climate ESG factors (e.g., social and governance risks) into this analysis?
Question 11: Do you have comments on the description of the climate transmission channels?
No comment
Question 12: Do you have comments on climate stress test (CST) tool and its use to test an institution’s financial resilience?
Paragraph 66 indicates that institutions should progressively develop their Climate Stress Testing (CST) approaches. It would be beneficial for the EBA to provide specific timelines for this progression, along with recommended phases or deadlines for institutions to align with its guidance. In particular, what are the expectations over 12, 24, and 36-months time horizons?
Regarding Paragraphs 57 and 58, it appears that the EBA expects climate factors to be integrated into Business as Usual (BAU) Stress Testing models, such as those used in the Internal Capital Adequacy Assessment Process (ICAAP). We recommend that the EBA clarify whether institutions can maintain separate climate stress test models – and use those models to estimate a capital overlay - or if they are expected to integrate these into existing BAU Stress Testing models.
Additionally, as noted in previous responses, clarification on the extent to which environmental risks beyond climate should be included in the CST, along with associated timelines for evolving these capabilities, would be helpful.
Question 13: Do you have comments on the Climate Resilience Analysis (CRA) tool and its use to challenge an institution’s business model resilience?
As observed for the CST tool, the CSA also emphasizes on the climate-related factors. It would be helpful to provide further clarity regarding how and when environmental risks beyond climate are expected to be in included in the CRA.
Question 14: Do you have any additional comments on the draft Guidelines on ESG Scenario Analysis?
We encourage the EBA to provide additional guidance on the following areas:
Is there an expectation that climate should be considered / be featured in the baseline scenario in ICAAP as well as adverse scenarios, or should climate feature as its own adverse scenario?
- We have observed that many organisations have faced challenges in aligning their internal ESG risk financial materiality assessments, stress testing, and scenario analysis with CSRD disclosure requirements, particularly regarding the time horizon definition. Additionally, organisations often rely on their historically established time horizons for climate-related financial risk materiality assessments. How can organisations reconcile these differing time horizons to comply with the Draft ESG Scenario Analysis Guidelines? The attached appendix provides examples that illustrate the variations in definitions across regulatory requirements and among different organizations.