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European regulators factor ESG risk in revised guidelines (2023)
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The European Banking Authority—headquartered in Paris—has announced that it will be revising its guidelines for capital requirements to account for client-related ESG risks. Unsurprisingly, financial institutions are leery of the proposed changes:
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In a world first, the European Banking Authority is revising the framework that sets industrywide capital requirements for lenders — known as Pillar 1 — to incorporate environmental and social risks. Some of the obligations will be enforced immediately, while others will be rolled out over time and will in some cases lead to new legislation, according to the EBA. For banks, the regime means they’ll have to review default and loss probabilities, as well as the risk weights that go into determining how much capital they set aside for each client account. The development may have major implications for high-emitting sectors such as oil, gas, cement, steel and mining. Cracking down on such risks will be “a key area” for banks under the new framework, said Jacob Gyntelberg, director of economic and risk analysis at the EBA. Current rules already allow banks to “take a forward-looking perspective,” and this is “one of the areas where we should be able to move a little bit faster,” he said in an interview. … The European Banking Federation, an umbrella organization for lender associations across the region, is worried there’s inadequate data to justify imposing Pillar 1 ESG adjustments, rather than so-called Pillar 2 rules, which are specific to individual banks, said Denisa Avermaete, senior adviser at the EBF. The EBF’s key concern now is that the prudential framework “remain evidence and risk based,” she said. “It is also crucial that once the EBA considers a more comprehensive revision of Pillar 1 or a macroprudential framework, this is done at a global level to ensure a level playing field for EU banks.” … The EBA says ESG-related losses are set to become more correlated, which is “changing the risk profile for the banking sector. The development is expected to become more pronounced over time and has implications for “traditional categories of financial risks, such as credit, market and operational risks,” according to the watchdog. The EBA’s report contains more than five pages of instructions to banks and national supervisors for short and longer-term changes. Banks and their national supervisors will be expected to reassess collateral values and incorporate environmental risks into trading book budgets. That includes internal trading limits and the creation of new products, the EBA said.[1] |
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See also
- Environmental, social, and corporate governance (ESG)
- Economy and Society: Ballotpedia's ESG newsletter
External links
Footnotes
- ↑ Note: This text is quoted verbatim from the original source. Any inconsistencies are attributable to the original source.
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