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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1. Please provide details of other relevant frameworks for ESG factors you use.


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

Generally speaking, ESBG agrees with the proposed theoretical definition of ESG factors and ESG risks. Nevertheless, we observe some undefinitions and drawbacks with their practical application.

First, the EBA does not provide a list of mutually exclusive social and governance factors, which are crucial for the understanding of both definitions. Examples provided by the EBA frequently overlap among social and governance leaving wide space to undefinition.

ESG risks, as explained in the discussion paper, entail a wide list of different factors with an intrinsic different nature, despite their commonalities enumerated in the paper. Such different nature could lead to different outcomes in the way, such as the need and the moment of integrating them into banks’ prudential framework. We do not recommend to follow this common taxonomy of ESG risks on prudential matters.

Differences in nature are reflected for example in their different transmission channels. Environmental risks are mainly channelled through physical and transition risks, whilst social and governance factors are mainly channelled through liability and reputational risks. The first has visible systemic impacts for the whole economy, and consequently for the financial system whilst the second have always been present to some degree in the usual functioning of companies (and as such are second-order effects partially captured by traditional risk parameters as the probability of default and loss given default in credit risk analysis as well as by capital requirements). They are not measurable at this stage and cannot be disentangled from the usual activity of companies.

Given these substantial differences, we propose not to use the term ‘ESG risks’ in regards to prudential purposes. It would be more clear if the term ‘ESG risks’ is used only when enumerating aspects intrinsically common to all three categories. When enumerating recommendations addressed to climate/environmental risk management and supervision purposes, this should be reflected in the paper and we should avoid general references to ESG risks.

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.

Yes, in principle we agree. Negative impacts of ESG factors are those that impose burdens on institutions. This approach makes sense from a risk perspective and also simplifies the regulation of institutions because the regulatory perspective should primarily focus on risks and not on opportunities.

However, if analyses suggest that ESG factors have positive effects on institutions’ counterparties, this positive impact on the risk assessment shall be included in institutions’ and supervisors’ practices from a prudential perspective.

With regard to the focus on the counterparties we believe that this focus is clearly appropriate for environmental, and particularly climate risk, but we have doubts whether this is the most relevant angle for social and governance risks at this stage. We acknowledge that social and governance factors have gained a lot of relevance, particularly from an investors point of view in recent years. More generally, the social interest for social responsibility, integration of long term objectives and other stakeholders interest in companies’ corporate governance is growing without any doubt. We recommend further analysis to determine whether (currently) it is for banks’ soundness more relevant their exposition to the impact of their own social and governance factors or the impact of the social and governance risks stemming from their counterparties. This analysis is key in order to properly define any modifications of the current prudential framework. It could be the case that at the current stage, different definitions can be more suitable to the different E, S and G risks.

Once the approach for definitions is set, the most relevant aspect for assessing the inclusion of ESG risks in institutions’ and supervisors’ practices from a prudential perspective is to determine whether they pose systematically a risk to the solvency of banks. We miss a systemic analysis of solvency implications for banks stemming separately from each of the ESG risks described in the discussion paper.

The need for including these risks in institutions’ and supervisors’ practices should be clearly justified and documented and shouldn’t be limited to the exposition of some examples or theoretical elaborations.

Whilst we identify a clear need of advancing in the inclusion of climate risks on institutions’ and supervisors’ practices from a prudential perspective, we do not consider that this is the case for social and governance risks.

Before elaborating further on their inclusion in the prudential framework, an assessment of their implications on the bank system’s solvency shall be made.

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

We consider they are correctly 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?

The proposed definitions of social risks and governance risks are fine in principle; however, there is a lot of undefinition between specific and relevant social and governance risks. The document frequently mixes both types of risks and this can be problematic for their management.

In principle, a restriction in the report to the main climate and environmental risks as in the ECB Guide (or even better to only climate risks) makes sense. This is because the research for climate risks is the most advanced and the most extensive databases are available for climate risks. The methodological approach to them and their definition is also clearer.

As stated in Q3 and on the general remarks, we have doubts on the most relevant perspective for dealing with social and governance risks, i.e. whether the discussion paper should focus on impacts from counterparties risks or from the own banks’ factors.

ESBG members have made a huge effort in dealing with the COVID-19 crisis and their decisions have been directly related to the management of their own social factors. Our members have taken several measures to support families both as part of their social commitments and in order to manage risks emerging from the crisis to our own balance sheets.

Apart from providing/ extending loan deferrals/moratoria as well as providing other solutions related with the financial services, savings and retail banks helped, among others, to improve customers’ income situation e.g. paying unemployment benefits in advance, paying pensions in advance, eliminating commissions for the use of ATMs. Savings and retail banks also provided train-ing for digital banking services, which have become more important and popular during the crisis, and education on digital skills, as well as special service for risk group/elderly e.g. one hour per day the bank branches, are accessible only for them. Other savings and retail banks’ support measures include collaboration with soup kitchens, food banks and social food stores to ensure that they are well equipped against the background of growing demand. Banks have initiated a large-scale financial support plan for the public hospital sector. Some savings and retail banks pay lunch to school-children who do not get school food.

Data availability and methodological developments are not yet mature enough to be able to make any assessment of social and governance risks (as defined on the discussion paper ) stemming from the COVID-19 crisis. Additionally, banks do not currently consider these risks as part of their risk’s catalogues. In this regard, it does not make sense to talk about an impact on banks approach to social and governance risks. On the contrary, as listed above banks made substantial efforts to remain compromised with their social commitments, and that reflects their approach to the management of their own social factors.

From our point of view, contrary to what is argued in the discussion paper, COVID-19 crisis does not differ – in regards to its medium to long term impact on companies’ performance - from the impacts that structural changes have had in the past in the performance of companies. Indeed, the most disrupting structural change in recent years is the digital revolution. The speed of adaptation to and integration of such changes is crucial. Banks’ monitoring of their exposures’ risks should allow identifying impacts in their financial risks coming from this structural change.

Such impacts, with currently available information, can hardly be isolated from the general management and business strategies of companies, something which is eventually reflected (as it has always been) on the credit quality analysis of companies (and as such, reflected at least partially on risks parameters).

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.

In principle, we agree with EBA’s considerations as included in the discussion paper regarding the fact that legal/liability risks can arise in relation to Environmental, Social and Governance when the clients are held accountable for the negative impact of their activities. We also understand the need to point out that such risks may also arise in relation to social and governance factors.

However, we don’t see the need to explicitly specify this as a separate transmission channel in relation to environmental factors as it is proposed in the current discussion paper. As EBA states in point 61, legal risks in the context of climate change are sometimes considered as part of either physical or transition risks. We would recommend EBA to clarify in the future guidelines that these risks do not have to be treated as a separate risk category/transmission channel and exclusively assessed for each of the E/S/G risk categories separately. One could even argue that the consequent liability / legal risks, even if they arise in the context of the client’s activities related to environmental factors are a subset of the governance (transparency or strategy and risk management) or social (i.e. workplace health and safety) risk category. We believe that considering the already established risk management frameworks and categorization of prudential risks in the credit institutions, banks should be allowed to treat liability risks as an inherent part of any of the risk categories in relation to ESG. Such explicit separation and exclusive assessment of liability risks in terms of each ESG category may be more meaningful only for investment companies but not for credit institutions.

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.


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

We do not consider appropriate to continue elaborating generally on ESG risks, as in the case of indicators. Aspects that refer exclusively to environmental, or more specifically to climate risks, should be defined and elaborated specifically for this type of risk. As explained in the general comments, environmental risks are essentially different in nature and as such their treatment shall be different. Most considerations related to qualitative and quantitative indicators are referred to as climate risks. We call EBA to distinguish clearly in the final report climate risks from other ESG risks.

Moreover, a sequential approached is needed. It should be made clear that the industry (and regulators as well) are still at an early phase and indicators will be emerging in the near future. In any case, the perspective (impact vs. risk) should be clarified. Impact indicators (such as the EU taxonomy) can be useful for internal management purposes, but they are not useful/limited in their use for risk assessment.

The first step should be data collection. If no data and information are available, no measurement methods can be used. Also, without available data, there is no way to assess a bank’s solvency, not even with forward/looking indicators. Consequently, it should be clarified that qualitative analyses are completely sufficient. When considering indicators, it is also important to ensure proportionality, as difficulties can arise in obtaining data, especially for smaller institutions or their small medium-sized customers.

In any case, we want to emphasize that there is a key consideration before elaborating further on the use of indicators: the need to include social and governance risks in the prudential framework shall be clearly justified. The risk these risks pose to banks’ solvency and which is not covered by the existing framework should be clearly demonstrated.

We would also like to remind that the current framework provides the tools to identify indicators of emerging risks. We consider that banks’ risk assessment exercises are enough to monitor the need of including or not these risks into banks’ prudential framework.

In the case that later these risks become material and thus, they should be included in banks’ prudential framework, guidelines and indications would be needed. But this should happen ex-post not-ex ante.

9. As an institution, do you use or plan to use some of the ESG indicators (including taxonomies, standards, labels and benchmarks) described in section 5.1 or any other indicators, inter alia for the purpose of risks management? If yes, please explain which ones.


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


11. As an institution, do you use or plan to use a risk framework method (including climate stress testing and climate sensitivity analysis) in your approach to measuring and managing ESG risks? Please explain why and provide details on the methodology used.


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.

Except for the categorization and definitions of methods provided by EBA in the discussion paper, we are aware of other approaches that could be considered by financial institutions and do not strictly align with the EBA proposals (i.e. portfolio, risk framework or exposure method).

We agree that the exposure method as described in 5.2.3 is a good fit for the origination com-pared to the other methods listed, but only for larger companies, where the relevant information and underwriting processes support a more in-depth assessment at client level (even though the relevant data is still scarce, although it is expected to improve over time in line with the non-financial disclosure requirements). However, it is not deemed to be appropriate for smaller clients (i.e. SME and micro companies), where a more automated approach to underwriting is applied. For the latter, a form of an aggregated exposure approach may be more adequate, i.e. the ESG factors and relevant risks are assessed at the industry segment / sub-segment and not per individual client and any risks are addressed through lending strategies and standards (i.e. exclusion criteria, risk parameters, etc.). We recommend this to be considered also in any future guide-lines as an acceptable approach. Any other listed approaches are not seen as meaningful for the purpose of underwriting/origination due to data availability issues and thus, from the automation and digitalization of the origination process point of view, which is critical for financial institutions in the long-term.

In regard to methods for quantifying ESG risks, it should be given institutions sufficient time to make methodological adjustments based on current developments.

We call EBA to distinguish clearly in its final report climate risks from other ESG risks. We do not consider it appropriate to continue generally referring to ESG risks when methods are suitable only for the management of only one of these risks (normally, climate risk).

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.


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

Smaller institutions can be susceptible to ESG risks, as can mid-sized and large institutions. In any case, it should be possible for the ESG risk management approach of small institutions to have strong qualitative traits.

The concept of proportionality set out in paragraph 149 is important. Proportionality as described in the paper refers to the size and the business model as well as the complexity of the activities of the banks. But it should also apply at the transaction level, i.e. less stringent requirements should apply to smaller loans (e.g. retail). It should also be noted here that obtaining relevant data from customers in the SME segment poses particular challenges. The standards to be developed must not result in disproportionate expenses for SMEs in the context of lending.

This is particularly relevant for social and governance aspects. If EBA decides to advance on the integration of social and governance risks, special attention should be made to the exclusion of portfolios for which social and governance risks cannot be entangled from the management of businesses as for example for self-employees or SMEs. There are similar proportionality considerations regarding sectors for which these risks are relevant.

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

Incentivising and pursuing cross-sectoral initiatives at EU level such as the EC sustainable corporate governance initiative could also support the adoption of strategic ESG risk-related objectives and/or limits. In particular, it would be helpful to avoid partial and/or not fully developed actions for the banking sector.

Also, the initiatives related to improving non-financial reporting shall be considered relevant to this area.

17. Please provide your views on the proposed ways how to integrate ESG risks into the business strategies and processes of institutions.

With regards to the requirements for a long-term and resilient business strategy and for the extension of the time horizon of strategic planning, it should be clarified that this should refer solely to ESG-related considerations and goals. The extension of the strategic planning calculations to time horizons far beyond five (5) years appears neither useful nor resilient. A detailed discussion of the effects of long-term trends within the strategic planning horizon should be sufficient. This could, for instance, desensitise investments in industries that are not sustainable. Furthermore, the horizons currently considered in the normative perspective are sufficient and should not be extended, as a meaningful quantitative assessment would then no longer be possible. Please, refer also to our answer to Q19.

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

We consider that the basis for the internal governance of ESG risks in institutions is already set in the existing framework. We do not see the need for defining specific governance rules for these risks.

We notice confusing recommendations on page 100. For example, in regard to the recommendation to allocate the responsibility related to ESG risks to a member of the management body, we don’t understand the need for this. We also notice a mix of recommendations regarding the creation of committees at different levels of responsibilities. This section should be carefully reviewed to avoid undue complexity.

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

Although the analysis of ESG risks is still evolving and at an early stage in comparison to other risks, methodologies and data availability appear to be far in a more advanced stage of development for some environmental risks, particularly climate risk, than for social and governance risks. As such, several steps of the proposed ways do not really seem feasible yet, even not needed. We strongly recommend postponing the introduction of social and governance risks in the prudential risk framework until materiality criteria are clearly identified for them.

Despite being at a more advanced stage, there are also several elements that need to be further developed in relation to environmental risks in order to facilitate its integration into banks’ risk management frameworks. Some leading examples include common definitions and classifications, data availability and adequacy of methodologies based on the characteristics of environmental risks.

The most difficult part in the integration of ESG risks encompasses their quantification and measuring how they affect relevant prudential risks that banks face. In contrast, more qualitative analysis can usefully orientate management decisions and internal actions on governance, business-es strategies and processes for those considered prudentially material.

We consider it appropriate to separate ESG factors that are considered as drivers of financial risks (e.g. via the customer rating) and ESG factors that are included in a separate limitation mechanism. For financial risks, integration can take place via the ICAAP. In the latter case, a separate materiality test, a separate strategy and a separate limitation mechanism would have to be installed.

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.

Firstly, it seems sensible to focus the report on climate and environmental risks, or rather only on climate risks. The otherwise high complexity of this report could pose major challenges to institutions. A proportional approach based on the real impact that the different ESG risks categories pose to solvency is fundamental.

Additionally, when the focus is in processes, methodologies and management of climate or other environmental risks, we do not consider appropriate to refer to them as ESG risks. It gives the false impression of being approaches valid for the three elements, while they are referring just to one of them.

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.


22. Please provide your views on the incorporation of ESG factors and ESG risks considerations in the business model analysis of credit institutions.

Overall, the presentation of the incorporation of ESG factors and ESG risks considerations in the business model analysis of credit institutions is acceptable. We agree with the idea of having a longer-term view of banks’ objectives and how different ESG considerations (affecting and being affected by banks actions) are incorporated into these objectives. However, the inclusion of ESG factors and risk considerations should mainly extend to the analysis of the business environment and the current business model. Regarding the analysis of strategy and financial planning, the analysis should be limited to the previous time horizon. Currently, it is not feasible to extend the economic sustainability analysis beyond the procedure described in the SREP guidelines.

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.

We partially agree with this. We think that applying a longer-term view in the supervisory assessment of banks’ business models could be informative and useful to better understand the characteristics and implications of different banks activities. The implications of long-term trends, political goals, etc. on the business model and activities should be addressed as part of strategic planning. However, a distinction must be made between a long-term vision and consistent, reliable and detailed plans for a period of 3 to 5 years on the way to achieving this vision.

Additionally, such assessment should not give rise to only partial policy actions for the banking sector. Wider and cross-sectoral policy actions – as for example, the EU Commission sustainable corporate governance initiative – are in our view more suitable as their scope is much larger, thus, it covers a substantial part of relevant stakeholders.

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.


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

In our view, there are still several intermediate steps that need to be completed before being able to efficiently incorporate ESG risks considerations into the assessment of risks to capital, liquidity and funding.

We believe that the existing obstacles and difficulties at this stage are particularly acute for social and governance risks not permitting the necessary quantification, assessment and mapping into relevant prudential risks for banks’ counterparties. Nonetheless, the incorporation of environmental risks is not free of challenges itself, so a stepwise, gradual, non-prescriptive and careful approach is also warranted.

EBA and other supervisory authorities confirm that ESG risks are risk drivers included in the known prudential risk types. In this respect, all ESG risks that hit in the period on which the calibration of the procedures for measuring these risks is based are already reflected in these risks. Thus, we understand the question as to what extent a completely different realization of the risk factors can be expected for the future than in the past due to the dynamics of the ESG factors. Please clarify.

Paragraph 333 of the report explicitly talks about making "fundamental differences between the standard credit risk assessment (e.g. credit assessment based on a rating grade with a one-year probability of default) and their adaptations in order to take into account ESG risks". This in effect requires an additional assessment procedure suitable for ESG risks on the basis of the credit assessment procedures currently permitted by supervisory law. This, however, contradicts paragraph 332, where direct reference is made to "credit assessments".

Insofar as a new risk assessment/evaluation procedure for ESG risks should become necessary, it is imperative that the institutions be given sufficient time to build up data series and to check the suitability of the criteria with regard to their discriminatory power in the credit decision. Based on our experience with the expansion of rating procedures recognized by the supervisory authorities very long periods of time are needed. Otherwise, it should be offered the possibility of using procedures based on expert estimation.

Furthermore, the explicit considerations listed in point 339 with regard to the specialized lending, requiring regulators to ensure that the use of project financing does not circumvent the assessment of how much counterparties are exposed to ESG factors, for instance by granting particularly favourable terms on a project facility with low ESG risks, while the counterparty as such is heavily exposed to ESG factors, is seen as a counterproductive to the nature of the project finance. Project finance transactions focus on the object being financed and hence the ESG assessment should definitely take place in relation to this object of the project and include relevant considerations. Such transactions are usually structured in a way that there is a special purpose company (SPC) being financed on a non-recourse basis to other SPC of the client. Each SPC represents a closed risk group and neither the SPC’s sponsor(s) nor other members of the client group are liable for repayment of the SPC’s debt in case of default. Due to the nature of such transactions, any assessment on the client level, even if the client is exposed to higher ESG risk on other projects but not on the project financed by the financial institution, is seen as a counterproductive to the EU and any regulatory expectations for banks to help and support ESG friendly undertakings.

26. If not covered in your previous answers, please provide your views on whether the principle of proportionality is appropriately reflected in the discussion paper, and your suggestions in this respect keeping in mind the need to ensure consistency with a risk-based approach.

The principle of proportionality is not adequately addressed as a reference is made almost exclusively to methods and data that are available at best to the largest and most research-intensive banks. For this reason, we argue that it must be possible to allow largely qualitative methods for addressing ESG risks and that this possibility should also be adequately discussed in the final guidelines.

The principle of proportionality is also not respected at the level of transaction type (e.g. retail business) and transaction size (e.g. individual transaction in relation to the total or partial portfolio). If extensive data had to be collected from all customers, even for e.g. small amounts of retail financing, all currently customary thresholds in terms of risk relevance would be disregarded, as would numerous consumer protection regulations at both national and EU level.

27. Are there other important channels (i.e. other than the ones included in chapter 7) through which ESG risks should be incorporated in the supervisory review of credit institutions?


28. As an institution, do you use or plan to use some of the indicators and metrics included in Annex 1? If yes, please describe how they are used in relation to your ESG risk management approach.


29. If relevant, please elaborate on potential obstacles, including scope of applicability, granularity and data availability, associated with the indicators and metrics included in Annex 1.


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Name of the organization

ESBG (European Savings and Retail Banking Group)