Banks in the European Union must have a 10-year plan spelling out how they will deal with environmental, social and governance (ESG) risks to their bottom line, the bloc’s banking watchdog said on Wednesday (23 June).
Increasing volumes of money are going into climate-friendly investments and regulators want investors to have a reliable snapshot of a company’s green credentials.
The report from the European Banking Authority (EBA) set out recommendations for banks and their supervisors for approaching ESG risks and to help the EU meet its goals of cutting carbon emissions by 2050.
Banks should plan strategically over a period of at least 10 years to show their resilience to different scenarios, disclose strategic ESG objectives, and assess the need to develop sustainable products, EBA said.
Climate risks can include “physical” or weather-related events like floods, and “transition” risks from sudden changes in asset values.
The EBA report looks at the second pillar of core banking rules that assess how risks at a lender are managed.
It is expected to set out detailed guidance for the third pillar relating to disclosures of risks later in the year. Work on pillar one or whether actual capital requirements need changing to reflect ESG risks, is expected at a later date.
The report builds on existing EU initiatives such as a taxonomy that defines a sustainable product, and disclosure rules for all types of companies.
The European Central Bank which regulates top eurozone lenders will use the report from the end of 2022 for updating its annual “SREP” review of whether banks hold enough capital to cover risks on their books.
All EU banking supervisors will be required to apply the report or explain any gaps.
“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,” said Fabien Le Tennier, a policy expert in EBA’s ESG Risks unit.
Banks typically plan strategically for up to five years ahead at present.
“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,” Le Tennier said.