Response to consultation on Guidelines on ESG scenario analysis
Question 1: Do you have any comments on the interplay between these Guidelines and the Guidelines on the management of ESG risks?
No
Question 2: Do you have comments on the proposed definition of scenario analysis and its various uses as presented in Figure 1?
No
Question 3: Do you have comments on the proposed distinction made between short-term scenario analysis (CST) and longer-term scenario analysis (CRA) as illustrated in Figure 3?
No
Question 4: Do you have any comments on the interplay between these Guidelines and the Guidelines on institution’s stress testing?
No
Question 5: Do you have comments on the Climate Scenario Analysis framework as illustrated in Figure 4?
No
Question 6: While respecting the definitions provided in other parts of the regulation, is there any concept/s used in these guidelines that it would be useful to include in an annexed glossary?
No
Question 7: Do you have comments on section 4.1 Purpose and governance?
No
Question 8: Do you agree that the proposed proportionality approach is commensurate with both the maturity of the topic and the size, nature and complexity of the institution’ s activities?
No
Question 9: Do you agree with the proposed references to organisations in paragraph 28? Would you suggest alternative or complementary references?
No
Question 10: Do you have additional comments on section 5.1 Setting climate scenarios?
No
Question 11: Do you have comments on the description of the climate transmission channels?
The impacts of Climate Change on Operational Risk may arise from a combination of three factors, i.e. not only direct physical impacts, but also changes in human and institutional behaviours, and economic shocks, involving significant and rapid changes in economic metrics.
There are complex feedback loops between these three factors, and each may be more influential under different Climate Change scenarios, and over different time horizons.
As a consequence, the EBA’s examples of transmission channels for Operational Risk should be extended to include both changes in human and institutional behaviours, and also economic shocks driven by both Physical and Transition Risks.
This is important as, arguably, one of Operational Risk’s key characteristics is its sensitivity to significant and rapid economic change.
(A detailed answer is provided in the attached file).
Question 12: Do you have comments on climate stress test (CST) tool and its use to test an institution’s financial resilience?
No
Question 13: Do you have comments on the Climate Resilience Analysis (CRA) tool and its use to challenge an institution’s business model resilience?
No
Question 14: Do you have any additional comments on the draft Guidelines on ESG Scenario Analysis?
As Climate Change poses an existential threat to humanity, it has the potential to create uniquely severe reputational damage to banks by significantly altering both their stakeholders’ expectations and also their perceptions of firms.
The ECB observed that banks should “evaluate the extent to which the nature of the activities in which they are involved, increases the risk of a negative financial impact arising from future reputational damage...”. [1]
Consequently, the transmission channels in the EBA’s Scenario Analysis guidelines should be extended to cover reputational damage linked to Climate Change, arising from risk events due to both Physical and Transition Risks; and also proactive decisions made by firms, as well as, their failure to act. These primarily relate to Transition Risks.
(A detailed answer is provided in the attached file).
[1] ECB, (2020) “Guide on climate-related and environmental risks supervisory expectations relating to risk management and disclosure”.