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?
To improve clarity and readability, this section could more clearly and thoroughly explain what these guidelines add compared to those on ESG risk management.
Question 2: Do you have comments on the proposed definition of scenario analysis and its various uses as presented in Figure 1?
More detailed guidance should be provided on the types of scenarios to be used, their degree of severity, whether feedback loops should be considered, the appropriate level of granularity, and the types of models that should be preferred for translating these scenarios into changes in credit risk parameters.
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?
Figure 3 clearly and effectively summarizes the differences between CST and CRA. However, it could be helpful to further elaborate on the interlinkages between CST and CRA, as well as the potential for developing long-term capital planning frameworks.
Question 4: Do you have any comments on the interplay between these Guidelines and the Guidelines on institution’s stress testing?
It should be further clarified how these two Guidelines will interact and evolve jointly. For example, will these Guidelines contribute to the revision of the Guidelines on institution's stress testing, or is there an intention to merge both Guidelines in the coming years?
Question 5: Do you have comments on the Climate Scenario Analysis framework as illustrated in Figure 4?
In the absence of long-term capital and liquidity requirements under the CRA, a set of KPIs would be useful to monitor long-term objectives under both baseline and adverse scenarios.
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 specific comment on this question.
Question 7: Do you have comments on section 4.1 Purpose and governance?
This section could benefit from more detailed guidance on the organizational level at which scenarios should be developed or defined, as well as on the corresponding validation process.
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?
Does the 'degree of sophistication of the approach' refer solely to the scenario analysis, or also to the models used to translate these scenarios into changes in credit risk parameters? A dedicated focus on institutions using the Standardised Approach would also be helpful.
Question 9: Do you agree with the proposed references to organisations in paragraph 28? Would you suggest alternative or complementary references?
It may be difficult for some institutions to navigate between the various scenarios proposed by different international organisations, particularly when it comes to selecting the most relevant ones for their situation and/or adapting them to their own level. This is why further guidance on the scenarios to be used would be helpful.
Question 10: Do you have additional comments on section 5.1 Setting climate scenarios?
Regarding transition risk, the types of scenarios described in paragraph 35 are helpful, but it would be preferable to provide more detailed guidance – for example, on carbon pricing, energy and commodity prices, or expected reductions in consumer demand for certain types of products or services. Similarly, it would be useful to specify the types of physical risk scenarios to be used (e.g., the various climate hazards to consider, their severity levels, and the assumed return periods), as well as the types of functions that could be used to translate these scenarios into asset losses.
Question 11: Do you have comments on the description of the climate transmission channels?
No particular comments; this section is sufficiently complete and detailed.
Question 12: Do you have comments on climate stress test (CST) tool and its use to test an institution’s financial resilience?
This section could be further complemented with the following information: the types of scenarios to be used (both micro and macro, covering physical and transition risks); the specific risk parameters to be impacted; and the types of models recommended (e.g., national damage functions combined with theoretical or statistical financial models) to assess the transmission of scenarios to each risk parameter. It should also clarify the approach to capital calculation (e.g., use of the Pillar 1 formula or alternative methods for calculating internal capital). Providing such guidance would help reduce methodological divergences and enhance comparability across institutions.
Question 13: Do you have comments on the Climate Resilience Analysis (CRA) tool and its use to challenge an institution’s business model resilience?
A set of long-term scenarios should be recommended, including chronic events and an increasing frequency and intensity of acute events, rising carbon and energy prices, resource depletion, and the potential obsolescence of business models. Institutions should also be recommended to demonstrate their ability to adapt their business models in response to various adverse long-term scenarios and to develop corresponding long-term strategies.
Question 14: Do you have any additional comments on the draft Guidelines on ESG Scenario Analysis?
It could be useful to provide more details on how these Guidelines should be interpreted in relation to the EBA EU-wide stress test methodology, as well as the ECB’s guides, reports, or notes on climate stress testing. Additionally, clarification on how they will align with and evolve alongside existing regulatory frameworks – such as the EBA Guidelines on ESG risk management, ICAAP/ILAAP Guidelines, Guidelines on institutions’ stress testing, SREP Guidelines, and Internal Governance Guidelines – would be beneficial.