EU: EBA consult on guidelines on the management of ESG risks 

The European Banking Authority (EBA) has published a consultation paper setting out draft guidelines on the management of ESG risks. The guidelines, published on 18 January 2024, set requirements for the internal processes and ESG risks management arrangements that institutions should have in place.

Background 

The EBA has observed that management of ESG risks is still at early stages and several shortcomings have been observed in the inclusion of ESG risks in business strategies and risk management frameworks. In light of this, the EU's forthcoming Banking Reform Package makes proposed amendments to the EU Capital Requirements Directive (CRD VI) under a new Article 87a to require that short, medium and long-term horizons of ESG risks be included in credit institutions’ strategies and processes for evaluating internal capital needs as well as internal governance. The EBA has developed these draft guidelines to address the mandate specified in paragraphs (a), (b), and (c) of Article 87a(5) CRD VI and in line with its roadmap on sustainable finance.  The mandate set out in Article 87a(5)(d)  referring to the criteria for setting specific climate-related scenarios will be addressed through subsequent EBA work (which may include a parallel update of the EBA guidelines on institutions’ stress testing and/or the development of other relevant guidelines).

EBA Guidelines

The draft guidelines:

• Aim at enhancing the identification, measurement, management and monitoring of ESG risks by institutions and at supporting their safety and soundness as they are confronted with the short, medium and long-term impact of ESG factors.
• Contain requirements as to the internal processes and ESG risks management arrangements that institutions should have in place, including specific plans to address the risks arising from the transition and process of adjustment to relevant sustainability legal and regulatory objectives (see further on transition plans below).
• Include minimum reference methodologies to be developed and used by institutions to measure ESG risks. Acknowledging the continuous progress in the availability and development of ESG risks data and methodologies, focus is on the main features of key types of methodologies, whilst flexibility is left to institutions regarding specific details, also to facilitate the development of institutions’ own methodologies over time.

Spotlight on Transition Plans

Transition planning is relevant under several pieces of EU regulation, such as CSRD and CSDDD. However, whereas those requirements focus on ensuring business models are compatible with net zero emissions by 2050,  the  proposed EBA guidelines deal with CRD-based plans with a view to providing a common understanding of what a risk-based (transition) plan entails in the prudential space - according to the EBA, CRD based prudential plans aim at ensuring that institutions comprehensively assess and embed forward-looking ESG risks considerations in their strategies, policies and risk management processes, including by taking a long-term perspective and with a view to ensuring their soundness and resilience to the risks faced.  The EBA note that the goal of prudential plans is not to force institutions to exit or divest from carbon intensive sectors, but rather to “prepare and adapt”.

Noting the fast-evolving developments related to transition plans and the need to preserve the responsibility of management bodies to set the overall business strategies and policies, these guidelines focus on processes and principles with an overview of the main features and core expectations of sound risk-based prudential (transition) plans - leaving flexibility and responsibility to institutions as to specific details and individual internal strategies.

Next steps

The consultation closes for comments on 18 April 2024.

The EBA will hold a public hearing on 28 February from 14:00 to 16:00 CET. (Registration required by 21 February.)

The EBA intends to finalise the guidelines by the end of 2024. Their application date will be aligned with the application date for the proposed CRD VI Directive. 

The EBA press release is available here.