Response to consultation on Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP)
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We welcome the ESMA/EBA consultation on the Draft Guidelines for common procedures and methodologies for the SREP for firms covered by the IFD.
We agree with the Consultation Paper that ESG risks should ultimately be reflected in all Pillars, including Pillar 1 as provided in Article 34 of the IFR.
This short response focuses on the integration of sustainability risks and impacts, a key area of engagement for WWF.
We appreciate that this draft set of Guidelines further interprets EBA's July 2021 report on ESG risk management and supervision published in July 2021, and that supervisors might interpret the Guidelines in conjunction with the ESG risk report. However, we question some of the interpretation choices that apparently have been made and would encourage supervisors to make a more explicit link between ESG factors and individual elements of the business model analysis.
However, in our view, an appropriate incorporation ESG risks would require such risks to be considered in every element of the BMA, instead of merely considering ESG risks as a stand-alone afterthought in a sensitivity test. This seems to be a move away from the detailed approach put forward in the EBA Report on ESG risk management and supervision, which fully integrates ESG risks into each element of the BMA.
The integration as proposed also does not explicitly recognize the the double materiality perspective of ESG factors, and the risk-mitigating elements of an ESG strategy where reduced ESG risks vis-à-vis peers can lead to a competitive advantage and improved sustainability of the business model, which could be integrated in the qualitative analysis of the current business environment (4.5.2).
Likewise, ESG risks and impacts may very well influence the business environment (4.4) of a firm, e.g., through regulatory trends or consumer investment preferences, as outlined in paragraph 291 of the EBA Report on ESG risk management and supervision.
We would encourage EBA/ESMA to be more explicit, and encourage supervisors to test for ESG sensitivity in every element of the SREP.
Question 1: Do you agree with the proposed categorisation and the proportionate approach to the application of the SREP to different categories of investment firms?
GENERAL COMMENT:We welcome the ESMA/EBA consultation on the Draft Guidelines for common procedures and methodologies for the SREP for firms covered by the IFD.
We agree with the Consultation Paper that ESG risks should ultimately be reflected in all Pillars, including Pillar 1 as provided in Article 34 of the IFR.
This short response focuses on the integration of sustainability risks and impacts, a key area of engagement for WWF.
We appreciate that this draft set of Guidelines further interprets EBA's July 2021 report on ESG risk management and supervision published in July 2021, and that supervisors might interpret the Guidelines in conjunction with the ESG risk report. However, we question some of the interpretation choices that apparently have been made and would encourage supervisors to make a more explicit link between ESG factors and individual elements of the business model analysis.
Question 11: Do you have any views or suggestions with regard to appropriate incorporation of ESG risks within SREP, including any proposed methods or criteria for the assessment of ESG risks within SREP?
We support the integration of ESG risks in the business model analysis (BMA) part of the SREP, so that they are considered an integral part of the SREP for every firm covered by the IFR. This horizontal approach confirms the ongoing nature of ESG risks and impacts which are financially material and relevant for the sustainability of an investment firm at any time horizon (including the "12 months" and "at least 3 years" foreseen by the BMA).However, in our view, an appropriate incorporation ESG risks would require such risks to be considered in every element of the BMA, instead of merely considering ESG risks as a stand-alone afterthought in a sensitivity test. This seems to be a move away from the detailed approach put forward in the EBA Report on ESG risk management and supervision, which fully integrates ESG risks into each element of the BMA.
The integration as proposed also does not explicitly recognize the the double materiality perspective of ESG factors, and the risk-mitigating elements of an ESG strategy where reduced ESG risks vis-à-vis peers can lead to a competitive advantage and improved sustainability of the business model, which could be integrated in the qualitative analysis of the current business environment (4.5.2).
Likewise, ESG risks and impacts may very well influence the business environment (4.4) of a firm, e.g., through regulatory trends or consumer investment preferences, as outlined in paragraph 291 of the EBA Report on ESG risk management and supervision.
We would encourage EBA/ESMA to be more explicit, and encourage supervisors to test for ESG sensitivity in every element of the SREP.