Response to discussion Paper on management and supervision of ESG risks for credit institutions and investment firms (EBA/DP/2020/03)
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We also agree that for investment firms with limited or no counterparty credit risk, and that do not deal on own account, the impact of the broad ESG risks set out in the Discussion Paper would be limited, if there is indeed an impact, and that the EBA’s described ESG factors would not manifest directly on such investment firms’ balance sheets.
We welcome the EBA’s clear delineation between the different types of investment firm and note that the primary focus of the ESG risk management considerations set out in the Discussion Paper, as they pertain to investment firms, is on investment firms dealing on own account.
In this way, it can be concluded that the ESG risk management considerations set out in the Discussion Paper, as they pertain to investment firms, are therefore less relevant to investment firms that do not deal on own account but only carry out portfolio management and investment advisory services, given the fundamentally different business model of each type of investment firm.
More relevant to investment firms that do not deal on own account but only carry out portfolio management and investment advisory services are the European Commission’s planned amendments to the MiFID II framework mandating the integration of sustainability risks/factors into their organisational requirements, risk management and portfolio management and investment advisory services. Indeed, these amendments to the MiFID II framework will complement existing rules applying to such investment firms under the Regulation on sustainability‐related disclosures (SFDR).
Moreover, though we acknowledge the thinking behind the theoretical “second order effect” scenarios in respect of investment firms providing portfolio management services as set out in Chapter 6.5 paragraph 271 (a) and (b), we note that such theoretical scenarios are not exclusive to ESG-related investment strategies and suggest that firms’ existing internal governance and business planning procedures already consider such scenarios more broadly.
As such, we encourage the EBA to take a clear delineated and risk-based approach to the ESG risk management considerations set out in the Discussion Paper, as they pertain to investment firms, by focusing on firms operating business models that are more exposed to the types of ESG risk outlined in the Discussion Paper (Chapter 6.5 paragraph 266); i.e. investment firms regulated under the EU CRD/CRR framework, in particular where they are exposed to counterparty credit risk and deal on own account.
In addition to the above and of particular relevance to investment firms, we note that the EBA Discussion Paper uses different definitions and terminology to those used in the SFDR when defining ESG factors and ESG risks (as opposed to sustainability factors and sustainability risks). We consider the use of different definitions and terminology to be imprudent and will lead to confusion across the financial services industry. We therefore encourage the EBA to use existing definitions and terminology where they exist in EU legislation (in particular in the SFDR) or internationally agreed standards so as to ensure consistent implementation and a coherent regulatory framework.
21. Specifically for investment firms, what are the most relevant characteristics or particularities of business strategies, internal governance and risk management that should be taken into account for the management of the ESG risks? Please provide specific suggestions how could these be reflected.
We generally agree with the EBA’s assessment, as set out in Chapter 6.5, that the broad ESG considerations and risks set out in the Discussion Paper relating to credit institutions could be relevant in the context of investment firms regulated under the EU CRD/CRR framework, in particular where they are exposed to credit risk (e.g. counterparty credit risk) and market risk (e.g. for positions they take on own account).We also agree that for investment firms with limited or no counterparty credit risk, and that do not deal on own account, the impact of the broad ESG risks set out in the Discussion Paper would be limited, if there is indeed an impact, and that the EBA’s described ESG factors would not manifest directly on such investment firms’ balance sheets.
We welcome the EBA’s clear delineation between the different types of investment firm and note that the primary focus of the ESG risk management considerations set out in the Discussion Paper, as they pertain to investment firms, is on investment firms dealing on own account.
In this way, it can be concluded that the ESG risk management considerations set out in the Discussion Paper, as they pertain to investment firms, are therefore less relevant to investment firms that do not deal on own account but only carry out portfolio management and investment advisory services, given the fundamentally different business model of each type of investment firm.
More relevant to investment firms that do not deal on own account but only carry out portfolio management and investment advisory services are the European Commission’s planned amendments to the MiFID II framework mandating the integration of sustainability risks/factors into their organisational requirements, risk management and portfolio management and investment advisory services. Indeed, these amendments to the MiFID II framework will complement existing rules applying to such investment firms under the Regulation on sustainability‐related disclosures (SFDR).
Moreover, though we acknowledge the thinking behind the theoretical “second order effect” scenarios in respect of investment firms providing portfolio management services as set out in Chapter 6.5 paragraph 271 (a) and (b), we note that such theoretical scenarios are not exclusive to ESG-related investment strategies and suggest that firms’ existing internal governance and business planning procedures already consider such scenarios more broadly.
As such, we encourage the EBA to take a clear delineated and risk-based approach to the ESG risk management considerations set out in the Discussion Paper, as they pertain to investment firms, by focusing on firms operating business models that are more exposed to the types of ESG risk outlined in the Discussion Paper (Chapter 6.5 paragraph 266); i.e. investment firms regulated under the EU CRD/CRR framework, in particular where they are exposed to counterparty credit risk and deal on own account.
In addition to the above and of particular relevance to investment firms, we note that the EBA Discussion Paper uses different definitions and terminology to those used in the SFDR when defining ESG factors and ESG risks (as opposed to sustainability factors and sustainability risks). We consider the use of different definitions and terminology to be imprudent and will lead to confusion across the financial services industry. We therefore encourage the EBA to use existing definitions and terminology where they exist in EU legislation (in particular in the SFDR) or internationally agreed standards so as to ensure consistent implementation and a coherent regulatory framework.