Response to consultation on draft ITS on Pillar disclosures on ESG risk
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There could be quantitative information added to social risks:
- amount of flex workers compared to fixed contracts, which could lead to protest and resulting higher wages, affecting the profits of the company and potentially the loan repayments
- ratio of remuneration by the board as compared to the lowest paid workers/employees, which could lead to customers avoiding the company's products (happened in The Netherlands)
Examples of quantitative governance information to be provided:
- amount of financial resources spent on applying each climate, environmental, social and governance risks (to build internal capacity, apply risk management and reporting, e
tc.)
- the taxes paid per country as aggressive tax strategies lead to reputational damage and increasingly potential fines or changing laws that affect the profits, ESG ratings and loan repayment capacity/access to finance capacity of a company
Here are some examples of additions to qualitative information on social risks:
- business strategies & processes. 2. customer safety, protection and privacy; discrimination; abiding to transparency requirements related to lobbying
- governance: 5. how much internal capacity is being built (with how much resources) and how much information for social risk assessment is reliant on external capacity (external ESG ratings, consultancies, social audits, etc.) ;
- risk management: 9. identify sectors in loan & trading book with enhanced social risks (e.g. agriculture (migrant workers, low wages), mining (affected communities), garment (low wages), ITC products (unhealthy working conditions) and enhanced chance of being under public and political scrutiny;
11. social risks to be identified include change of consumer behaviour, discrimination an inclusiveness issues, scenario's about increasing inequality (which might affect companies profitability), social impacts of climate change, climate adaptation and environmental damage.
Here are some examples of additions to qualitative information on governance risks:
- governance indicators 1. alignment with Paris Agreement : below 2 degrees (NOT 2 degree scenario's), preferably 1.5 degrees scenario, alignment with (soon to be agreed) agreement against tax dodging strategies
3., 6. ethical considerations and transparency should also inlcude on tax payments per country; disclosure of lobbying positions, activities, expenditure and internal decision-making responsibility;
Question 1: Are the instructions, tables and templates clear to the respondents?
No, the instructions and tables are too limited regarding the social and governance risks, certainly as compared to the details of the climate risks. (See also response on Q4)Question 2: Do the respondents identify any discrepancies between these tables, templates and instructions and the disclosure requirements set out in the underlying regulation?
There is not enough coverage of how climate/environmental, social, risks assessments are intertwined, for instance the transition risks of climate change can contain more social impact that are risks such as changing business models that affect job(lessnes) and new skills, a new generation of shareholders of companies that will pressure companies for swifter integration of climate, environmental and social change, impacts of environmental related migration that might affect particular sectors, etc. The negative impacts of climate change and environmental damage can also be better described in the social risks, e.g. climate related health issues (e.g. heat waves) that will affect workers (in particular sectors)Question 3: Do the respondents agree that the new draft ITS fits the purpose of the underlying regulation?
Not really, there is an imbalance the disclosure information required between climate, environmental, social and governance risks. It follows from an underestimation and lack of analysis of the impacts social and governance risks might be or become material.There could be quantitative information added to social risks:
- amount of flex workers compared to fixed contracts, which could lead to protest and resulting higher wages, affecting the profits of the company and potentially the loan repayments
- ratio of remuneration by the board as compared to the lowest paid workers/employees, which could lead to customers avoiding the company's products (happened in The Netherlands)
Examples of quantitative governance information to be provided:
- amount of financial resources spent on applying each climate, environmental, social and governance risks (to build internal capacity, apply risk management and reporting, e
tc.)
- the taxes paid per country as aggressive tax strategies lead to reputational damage and increasingly potential fines or changing laws that affect the profits, ESG ratings and loan repayment capacity/access to finance capacity of a company
Question 4: Do the respondents agree that the tables with qualitative information proposed capture properly the information that institutions should provide?
There should be additional information required on the qualitative social and governance risks (as mentioned in Annex XXXVIII instructions, which are still very general.Here are some examples of additions to qualitative information on social risks:
- business strategies & processes. 2. customer safety, protection and privacy; discrimination; abiding to transparency requirements related to lobbying
- governance: 5. how much internal capacity is being built (with how much resources) and how much information for social risk assessment is reliant on external capacity (external ESG ratings, consultancies, social audits, etc.) ;
- risk management: 9. identify sectors in loan & trading book with enhanced social risks (e.g. agriculture (migrant workers, low wages), mining (affected communities), garment (low wages), ITC products (unhealthy working conditions) and enhanced chance of being under public and political scrutiny;
11. social risks to be identified include change of consumer behaviour, discrimination an inclusiveness issues, scenario's about increasing inequality (which might affect companies profitability), social impacts of climate change, climate adaptation and environmental damage.
Here are some examples of additions to qualitative information on governance risks:
- governance indicators 1. alignment with Paris Agreement : below 2 degrees (NOT 2 degree scenario's), preferably 1.5 degrees scenario, alignment with (soon to be agreed) agreement against tax dodging strategies
3., 6. ethical considerations and transparency should also inlcude on tax payments per country; disclosure of lobbying positions, activities, expenditure and internal decision-making responsibility;