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Response to discussion Paper on management and supervision of ESG risks for credit institutions and investment firms (EBA/DP/2020/03)
Go back4. Please provide your views on the proposed definitions of transition risks and physical risks included in section 4.3.
As in other areas, the regulators should stipulate clear expectations for retail business concerning transition risks. A more differentiated approach is needed. ESG factors in retail business depend on the usage of products (in particular mortgage business and investments), rather than the mostly homogeneous client characteristics in mass business. 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.
For the retail business, the focus should not be on the individual client due diligence but rather on portfolio specifics (eg employment sectors, collateral, product suitability) with a specific focus on mortgage valuation as the main lever for ESG. We underline the importance of (and the current lack of) alignment between the EU taxonomy with national building codes and certifications. This would facilitate the necessary collection of adequate data to assess and manage risk properly. 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.
To keep the standards manageable for smaller institutions, which are often part of wider banking or insurance groups, it is advisable to consolidate subsidiaries on a group level and use frameworks provided by the parent institution or the banking group. This will both provide a better overall view of the institution, as well as ensuring feasibility over banking groups.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 agree that ESG risks are longer-term risks. Bausparkassen are mostly already by law required to take a long term view (e.g. Germany requires a 20-year planning horizon), so some elements can be modeled, though in general, accuracy decreases when looking too far into the future. We propose qualitative and quantitative scenario analyses.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.
We appreciate the inclusion of proportionality in the discussion paper however, we believe that using only size for assessing proportionality should be avoided. The vulnerability of institutions in terms of ESG risks varies significantly according to an institution’s business model (eg retail, wholesale, investments), relative size, internal organization and nature and complexity of its activities. In terms of the business model we advocate for specific rules or an exemption for the retail business, especially with regard to mortgages as these will play a crucial role in achieving the EU’s ambitions under the Green Deal and the renovation wave. Name of the organization
European Federation of Building Societies
