Brussels (Brussels Morning) The European Banking Authority (EBA) presented recommendations for banks and regulators on Wednesday, calling on the banks to come up with 10-year plans for dealing with environmental, social and corporate governance (ESG) risks.
Citing the growing volume of green investments, the EBA stressed the importance of strategic planning and risk management in order to achieve the EU’s environmental goal of reaching carbon neutrality by 2050, Reuters reported.
Fabien Le Tennier, a policy expert in the EBA’s ESG Risks unit, noted “we are putting an initial emphasis on climate-related risks as data is more advanced, but banks should also advance their identification and understanding of social and governance risks”.
“Most of our recommendations will not come as a surprise for banks, but there will probably be a challenge for banks to meet all of them, at least in the near term”, he concluded.
At present, banks mostly rely on five-year strategic plans.
In following the proposed 10-year plan model, banks should assess their resilience in different scenarios and the need to provide new sustainable products as well as present their strategic ESG goals.
The EBA report points out that climate risks include “physical” events like severe weather, and “transition” risks from changes of asset values. It focuses on the second pillar of rules that assess how lenders manage risks.
The report builds on the EU taxonomy of sustainable products and disclosure rules for companies. The European Central Bank is to use the report to update its annual review of capital requirements for banks.
Later in the year, the EBA is to present recommendations for the third pillar of rules, which focus on risk disclosure. Meantime, it continues to work on guidance for the first pillar — whether capital requirements should be changed to reflect ESG risk. It is expected to release a report on the subject at a later date.