EBF Response to the EBA Consultative Document Guidelines on ESG risks management

EBF RESPONSE PAPER

EBF Response to the EBA Consultative Document Guidelines on ESG risks management

BRUSSELS, 16 April 2024 - The European Banking Federation welcomes the EBA's efforts in developing the draft Guidelines to ESG risk management (hereafter, "the Guidelines"), in accordance with Article 87a (5) of Directive 2013/36/EU (CRD IV).

Key messages:

• A gradual approachshould be envisaged in the Guidelines, starting with environmental considerations given their maturity level compared to S&G factors, as well as the fact that risks related to S&G factors are not comparable to environmental factors as a channel of materialization of financial risk.In addition, we suggest that the Guidelines should be limited to the banking book and focused on credit risk, while foreseeing a gradual approach when other risk types become more mature and/or material. A phased approach should also be considered for ESG risks concentration processes which imply first the identification and evaluation of ESG factors. It would be useful to shape an internationally agreed roadmap for the gradual progression of social and governance factors towards quantitative measures.

• Proportionalityis a crucial principle for Pillar II and should be considered more holistically and not only with regard to the size of the institution.Proportionality should be better linked to the business model and risk profile of a bank as well as to cost benefits and scope considerations.

• The entire Guidelines including provisions regarding data collection and engagement policy should be subject to the (financial) materiality assessment. Exposures towards certain sectors should not be considered materially exposed to environmental transition risk by default. Several other factors should be considered, such as maturity of the loans, diversity of the business, transition possibilities and mitigators.

• We believe sufficient room should be left for methodological flexibilitythat should be maintained over timeto allow regulatory certainty and avoid disruption by changing methodologies, which could generate greenwashing risk. This flexibility should also apply to the use of proxies as long as these cannot be reasonably replaced by reliable data. Banks should also be given more leeway in defining their ESG risk appetite, metrics and targets. Banks should be given flexibility to run their business model and strategy, including decarbonisation strategy, as long as they can demonstrate they have put in place a governance and a sound risk management framework. It should be up to the institutions to decide which measures they take to measure and mitigate risks. In the latter case, "bearing the risk" may also be a possible option that is not even considered by the EBA. As ESG risk management is becoming part of SREP, the supervisor will be in a position to assess the robustness of a bank's overall risk management framework.

• The use of data from data providers and use of proxiesshould be revisited in the Guidelines. The data providers are not only used to obtain estimates but also to optimize/complete the collection of data from corporates even where those data are publicly available (avoiding the need for institutions to examine thousands of sustainability reports of their clients). The decision on data collection should therefore be left to the institutions in a consistent manner with the outsourcing framework. Proxies could also be justifiable in particular cases, such as in the retail business or to alleviate the reporting burden of small companies and private customers. We recommend the EBA to further envisage the use of data at sectoral level where single-name information is not available. It would be useful to introduce a presumption that the data collected directly or indirectly (through data providers) from sustainability statement under CSRD complies with the data quality requirements. Availability of public databases regarding emissions, asset localization and insurance coverage would also be helpful. To increase comparability of data and improve understanding of the data that banks will continue collecting, we would like to stress the importance of "institutional proxies" and data made available by regulators and supervisors. We would therefore like to ask the EBA, in collaboration with the ECB, to make the aggregated information gathered through Fit for 55 (emissions), AnaCredit (statistics of losses), proxies from the ECB economy-wide stress test etc. available to the banking sector. In addition, we would like to suggest to EBA to elaborate further (practical) guidance on when and how proxies may be justified.

• We welcome the flexible approach regarding the CRD transition plans which requires consistency with the CSRD but leaves flexibility as to whether this results to a single transition plan. The link and the consistency between the CSRD transition plans to support the transition to a sustainable economy and CRD plans for managing associated risks should however be further clarified, in particular how the CRD based transition plans are to be implemented and managed in relation to the overall strategy. A clear conceptualization between transition plans to support the transition to a sustainable economy and prudential plans for managing risks associated with the said transition would be welcome. It would also be useful if EBA provides more insight on the elements that need to be worked on by banks in the prudential plan in addition to the CSRD transition plan, with clear articulation and justification of why a certain factor is important from a prudential (risk) perspective.

• The expectations on the customers' transition plans assessment should be clarified, including the role of third parties assessors and auditors. While banks should be in the position to understand client's plans, they should be able to rely on the third party assessment (e.g. auditors) of the robustness, soundness and credibility of these plans. Remits of the banks should be the same as for the financial statements. Banks can develop methodologies to assess their counterparties transition plans but cannot bear final responsibility for their credibility. We should be able to presume that plans published under CSRD are credible, reliable, robust and sound.

• For further key messages and detailed response to the consultation questions, please see our full response below.

For more information:

Denisa Avermaete, Senior Policy Adviser - Sustainable Finance, [email protected]

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About the EBF:

The European Banking Federation is the voice of the European banking sector, bringing together national banking associations from across Europe. The EBF is committed to a thriving European economy that is underpinned by a stable, secure and inclusive financial ecosystem, and to a flourishing society where financing is available to fund the dreams of citizens, businesses and innovators everywhere.

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