Response to discussion Paper on management and supervision of ESG risks for credit institutions and investment firms (EBA/DP/2020/03)

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2. Please provide your views on the proposed definition of ESG factors and ESG risks.

We believe that the definitions of the ESG factors and criteria proposed by the Authority are well structured and able to capture the general characteristics of the evaluation criteria used by the institutions.

3. Do you agree that, for the purpose of assessing their inclusion in institutions’ and supervisors’ practices from a prudential perspective, ESG risks should be approached primarily from the angle of the negative impacts of ESG factors on institutions’ counterparties? Please explain why.

We believe it is correct to start with an assessment of negative ESG factors in order to be able to more easily identify ESG risks and implement concrete measures to manage them.
Additionally, ESG factors could and should be examined in an even broader framework, such as the impact of risks on the activity of the key economic actors (enterprises, governments, etc.)

4. Please provide your views on the proposed definitions of transition risks and physical risks included in section 4.3.

We believe the definitions of transition risks and proposed physical risks are well defined.

5. Please provide you views on the proposed definition of social risks and governance risks. As an institution, to which extent is the on-going COVID-19 crisis having an impact on your approach to ESG factors and ESG risks?

We believe the proposed definitions are correct. The current crisis has highlighted the shortcomings that still exist in the consideration of social and governance factors by companies, credit institutions and financial institutions overall. It will be essential in the future not to focus the assessment of ESG factors and the consequent risks only from an environmental point of view – social and governance factors are just as important (as demonstrated by the letters S and G).

6. Do you agree with the description of liability transmission channels/liability risks, including the consideration that liability risks may also arise from social and governance factors? If not, please explain why.

As indicated in the previous answer, it is very important that the definition of liability risks also takes into account social and governance factors.

7. Do the specificities of investment firms compared to credit institutions justify the elaboration of different definitions, or are the proposed definitions included in chapter 4 also applicable to them (in particular the perspective of counterparties)? Please elaborate on the potential specificities of investment firms in relation to ESG risks and on how these specificities, if any, could be reflected in this paper.

We believe that the risk of liability for credit institutions may be greater than for an investment firm. In fact, credit institutions have a dual risk, their own and the one imported by the counterparties, with also significant implications from a reputational point of view.

8. Please provide your views on the relevance and use of qualitative and quantitative indicators related to the identification of ESG risks.

The use of ESG indicators is absolutely key to being able to assess the sustainable factors and risks of institutions, especially starting from the standards and taxonomy that have been developed in recent years by institutions, non-governmental organizations, rating agencies and data providers . Such indicators can help provide certain standards and universally accepted measures that allow for comparative assessment.
In the future, the focus should remain on quantitative indicators, which are the only means to evaluate any real progress and impact, but the qualitative indicators will play an important role in assessing the broader effects and goals.
It is absolutely crucial that a high level of standardisation is achieved, in order to enlarge and deepen the use of the criteria and to improve their comparability, in the best interests of all financial players.

12. .As an institution, do you use or plan to use an exposure method in your approach to measuring and managing ESG risks? Please explain why and provide details on the methodology used.

We believe that the sequential steps proposed for the incorporation of ESG risks into the management practices of institutions - i.e. identification, evaluation and action - are taken into account and considered properly.

13. As an institution, do you use or plan to use any different approaches in relation to ESG risk management than the ones included in chapter 5? If yes, please provide details.

We do not use the identified methods directly, but we appreciate the analysis of the same, proposed by the Authority. We believe that, to date, the method most widely used and easiest to implement is the one based on exposure, which has also proven its reliability over time. The other methods will be implemented more in the coming years.

14. Specifically for investment firms, do you apply other methodological approaches, or are the approaches described in this chapter applicable also for investment firms?

Methodological approaches can also apply to investment firms.

15. Please provide your views on the extent to which smaller institutions can be vulnerable to ESG risks and on the criteria that should be used to design and implement a proportionate ESG risks management approach.

The EBA's proposals are really innovative and it is clear that the smaller the institution, the greater the implementation difficulties are likely to be. Small companies may have problems related to excessive costs and to a lower level of competitiveness. Proportionate criteria could be assessed based on size.

16. Through which measures could the adoption of strategic ESG risk-related objectives and/or limits be further supported?

As indicated in the previous answer, it is important to graduate limits and objectives relating to ESG risks with respect to the size of the institution, defining basic criteria to be extended proportionally with respect to the size of the company or institution.

18. Please provide your views on the proposed ways how to integrate ESG risks into the internal governance of institutions.

The outlined perspective is very positive if projected in the long term. It will probably take a generational leap to arrive at an effective application. The measures envisaged are in fact certainly onerous for institutions to activate, especially if they are medium to small in size. It is necessary to imagine a gradual application. Where possible, there must always be a person or, preferably, a team or group of persons, within the company who performs the role of sustainability manager and who interfaces with the other internal governance functions.

19. Please provide your views on the proposed ways how to integrate ESG risks into the risk management framework of institutions.

We agree in principle with the proposed modalities to integrate ESG risks, taking into account the risk management framework; gradually and on a proportional basis. Depending on the sector to which the company belongs, the ESG elements that have more or less impact must be taken into consideration.

20. The EBA acknowledges that institutions’ approaches to environmental, and particularly climate-related, risks might be more advanced compared to social and governance risks, and gives particular prominence in this report to the former type of risks. To what extent do you support this approach? Please also provide your views on any specificities associated with the management of social and governance risks.

If it is true that climatic approaches have seen greater development, partially due to numerous regulatory developments. On the other hand, it is undeniable, given the type of activity carried out by investment firms and credit institutions, which in fact mainly provide services, that social aspects and governance have, overall, a greater impact on society as a whole than environmental ones. Therefore, social and governance approaches should definitely not be ignored when assessing ESG factors and especially ESG risks.

21. Specifically for investment firms, what are the most relevant characteristics or particularities of business strategies, internal governance and risk management that should be taken into account for the management of the ESG risks? Please provide specific suggestions how could these be reflected.

Investment firms might have a disruptive social impact on society, with different impacting areas, such as personnel and service management criteria, strategies for impact on the territory, effects on the real economy, etc. We hope our societies will initiate a gradual evolutionary process that allows for a widespread improvement in the quality of life in civil society. It is necessary to give greater importance to ethics, to be considered a necessary basis to keep the entire market on its toes, also in terms of reputational impact. We need to focus on social and governance factors, especially after the pandemic.

23. Do you agree with the need to extend the time horizon of the supervisory assessment of the business model and introduce as a new area of analysis the assessment of the long term resilience of credit institutions in accordance with relevant public policies? Please explain why.

In theory, yes, but at present, taking into consideration the most widespread business models, we believe that the extension of the prudential assessment to ten years is too long and too difficult to apply. There will have to be a gradual development.

24. Please provide your views on the incorporation of ESG risks considerations into the assessment of the credit institution’s internal governance and wide controls.

As mentioned, it is necessary to start from governance to achieve effective change, even if it will prove difficult to achieve in the short term. A gradual awareness is needed.

25. Please provide your views on the incorporation of ESG risks considerations in the assessment of risks to capital, liquidity and funding.

The social component is relevant in stress tests, also with regards to the assessment of capital, liquidity and financing risks.

Name of the organization

European Federation of Financial Advisers and Financial Intermediaries (FECIF)