The European Banking Authority (EBA) published on 13th December 2022 its roadmap on sustainable finance, outlining the objectives and timeline for delivering mandates and tasks in the area of sustainable finance and environmental, social and governance (ESG) risks.
Through various mandates as described in this roadmap, the EBA is requested to take concrete actions in a wider set of policy areas in a now more mature framework for sustainable finance. This is expected to be achieved by adding new areas of focus, including aspects related to labeling of sustainable products, greenwashing, as well as supervisory reporting and enhanced risk monitoring framework, key objectives which were analyzed below by Deloitte’s Dimitrios Goranitis (FSI Risk & Regulatory Advisory Partner) and Cătălin Ruja (Senior Manager).
Key objectives of the EBA’s Roadmap on Sustainable Finance
The roadmap explains the EBA’s sequenced and comprehensive approach over the next three years to integrate ESG risks considerations in the banking framework and support the EU’s efforts to achieve the transition to a more sustainable economy.
As a key objective, the EBA will contribute to developing an adequate regulatory and supervisory framework regarding ESG risks by analyzing how ESG risks are embedded in the current prudential regulation, and how institutions and competent authorities address these risks. When executing its roadmap and delivering its mandates on ESG, the EBA will pay particular attention to:
- ensuring continued resilience of the EU banking sector against the risks;
- appropriately applying the principle of proportionality;
- supporting the solid and consistent implementation of the EU and international agenda on sustainable finance.
The roadmap ensures continuity of actions assumed under the previous action plan, while accommodating the necessary adjustments following the market and regulatory developments, including the following eight areas of focus:
1. Transparency and disclosures
The EBA will continue to develop the disclosure templates on ESG risks. Further complementary work is expected in particular on:
a. the expansion of the scope of quantitative disclosures beyond climate risk mitigation and adaptation, including disclosure metrics on other ESG risks, in line with relevant developments at the EU and international level;
b. potential expansion of the scope of disclosure requirements to a larger universe of banks, should such a mandate be granted to the EBA by the EU legislators.
2. Risk management and supervision
Forthcoming work by the EBA in this area will provide more guidance to institutions and supervisors, in particular through Guidelines for institutions on the management of ESG risks and further revision of the Guidelines on SREP. The EBA has included ESG risks into its 2022 and 2023 European Supervisory Examination Programmes (ESEP), which is a selection of key priorities for prudential supervisors. The EBA will follow-up on how EGS risks have been implemented into supervisory practices, which will support the EBA’s work on the incorporation of EGS factors and risks into the SREP framework.
3. Prudential treatment of exposures
A two-step approach is being followed to address this mandate. Firstly, a discussion paper (DP) was published in May 2022, on which feedback from stakeholders has been sought. The DP initiated the discussion on the appropriateness of the current prudential framework to address environmental risk drivers and considered the potential justification for a dedicated prudential treatment.
The final report will pursue the analysis set out in the discussion paper and explore, for those elements of the framework which are most likely to be affected by environmental risk drivers, how these risk drivers can be best captured through either existing mechanisms or through enhancements or clarifications within the framework.
4. Stress Testing
The EBA, along with other ESAs and the ECB, has started preparation for a one-off joint climate stress test across the EU financial sector. This joint exercise should assess vulnerabilities in the financial system, including through interlinkages between different sectors within the financial system and how these vulnerabilities relate to the transition to the 2030 goals (Fit-4-55 package).
5. Standards and labels
In the medium term, the EBA, in coordination with the European Commission and the other ESAs, is expected to assess the relevance and need for an EU standard for sustainable loans and bonds. The EBA is also planning to monitor the green asset-backed security market to assess the relevance of developing a dedicated framework once the EU economy has further transitioned.
The objectives of the EBA when providing its inputs will be to:
- Provide insights into an understanding of the greenwashing phenomenon and identify the specific forms and dimensions it can take in the context of banking activities;
- Identify the existing market practices, regulatory frameworks, and supervisory tools which can be used to address greenwashing and to point out potential challenges and shortcomings.
7. Supervisory reporting
The European Commission’s proposal for the CRR revisions includes the requirement for institutions to report to their competent authority’s information on their exposure to ESG risks. Following the mandate in Article 430 (7) of the CRR and depending on the outcome of the negotiations on the revised
banking package, the EBA will develop the uniform reporting formats and templates through ITS for the reporting of this information.
The exact timelines for this work will depend on the results of the legislative work on the revised CRR, but the EBA plans to commence the work in 2023.
8. ESG risks and sustainable finance monitoring
The EBA has started preparatory work to put in place a monitoring system to assess material ESG risks taking into account the Paris Agreement and the United Nations Framework Convention on Climate Change. In the initial stage the monitoring framework will start as an internal monitoring tool, however going
forward it may be used to develop a more standardized, public data and information tool. It will also take into account the availability of data and methodologies and should eventually be expanded in scope to include also other categories of environmental risk beyond climate risk.
The EBA will assist institutions and supervisors in embedding ESG risks in their activities by:
- anchoring ESG risks in the relevant regulations;
- providing guidance on risk management and supervisory practices, and
- carrying out risk analysis and monitoring exercises, including climate stress tests.
What will banks be required to do?
Based on the guidelines, the institutions will be required to include the ESG factors in their risk management policies, including credit risk policies and procedures. The guidelines also set out the expectation that institutions that provide green lending should develop specific green lending policies and procedures covering granting and monitoring of such credit facilities. These guidelines are the first specific policy product developed by the EBA incorporating sustainability considerations.
While large part of the actions envisaged under the 2019 action plan has already been finalized, the work in these areas will continue, following also the previously specified sequencing. It is therefore necessary to adapt the initial action plan, adding new areas of focus, including aspects related to labeling of sustainable products, greenwashing, as well as supervisory reporting and enhanced risk monitoring framework.
To this end, the roadmap creates a continuity from the first action plan and at the same time builds on the latter to reflect the mandates and tasks that the EBA will fulfill in coming years.