We appreciate the risk-based approach the EBA is taking and want to emphasize the two following aspects:
It is stated in the DP that prudential requirements should reflect the risk profiles of exposures and should not be used for other policy purposes. We support this view.
Currently available data reflect ESG risks insufficiently and is therefore not eligible to adequately incorporate ESG risks into internal models. The insecure and future-oriented materialization of ESG risks over longer than usual time horizons add to this problem. Therefore, the requirement to integrate ESG risk into Pillar 1 prudential requirements and internal models should be done carefully in order not to distort the risks a credit institution is exposed to.

The framework for exposures secured by immovable property is already going to be more granular and complex in the CRR3 proposal. The CRR3 proposal includes a clarification in Art 208 that energy efficiency improvements unequivocally increase the property value. The framework of the Standardised Approach should be kept simple and understanding. Several different Regulations, Directives and Guidelines already deal with the topic of energy efficiency and the goals of the Paris Agreement. For example, the Directive on the energy performance of buildings is currently under review, and according to the EBA Guidelines on Loan Origination credit institutions have to take energy efficiency into account when having exposures secured by immovable property.

The SA framework partially relies on external credit ratings. In case the European Co-legislators decide to further strengthen the role of ESG-factors in the CRAR (Regulation (EC) 1060/2009) or the ESMA decides so in a review of its 2019 Guidelines on Disclosure Requirements Applicable to Credit Ratings, these standards should not be applied for internal models.

We do not see any need to strengthen the environmental criterion for the infrastructure-supporting factor as it is sufficiently considered. The criterion requires the obligor to have assessed whether the project in question contributes to environmental objectives. If the obligor is subject to NFRD/CSRD requirements, information should be available. Moreover, the list of criteria for the application of the infrastructure-supporting factor is already far too complex and extensive so that it is at this stage a challenge for the banks to fulfill it ( the EBA industry survey to understand how the banks have used the supporting factor was running until 27th of May, the final report may be available at the end of September).

As the EBA states in the DP, there are numerous challenges: such as the low availability of data, which is gradually improving (among other things due to the disclosure requirements), the nature of ESG risks (incl. requirement to take a long-term, forward-looking perspective) and the uncertainty regarding the behaviour of companies and other market participants. Therefore, it seems difficult to assess whether environmental risks can be better integrated into Pillar 1 through an adjustment factor than via already existing Pillar 1 instruments. Whether an adequate consideration of the risk is possible via a Pillar 1 adjustment factor depends on its design and applicability.
However, any green supporting factor should not increase the complexity of the framework.
In our opinion, a dedicated factor to support exposures deemed “green” is less complicated and more in line with the well-established approach e.g. with regard to support SMEs with the establishment of the SME supporting factor. It would not make sense in our opinion to create a variation of subsets and to further divide exposure classes.
This said, the current regulatory initiatives and a possible green supporting factor should be given time to assess if this sufficiently incentivizes the already happening transformation to a sustainable economy. Therefore, it would be counterproductive to prematurely include any “brown/red penalizing factor” or similar factors/exposure classes.

General remarks:
In our view, environmental risks are sufficiently addressed by Pillar 2 (SREP) and Pillar 3 (disclosure) requirements. Moreover, several supervisory expectations and guidances were published by competent authorities that address i.a. the management of environmental risks (e.g. ECB guide on climate-related and environmental risks for banks, EBA Report on management and supervision of ESG risks, national guidelines on ESG risks etc). In our view, the existing Pillar 1 framework provides sufficient mechanisms that allow an adequate consideration of environmental risks (eg via credit ratings or the valuation of collateral).
It is of utmost importance that all new measures in regard to the prudential consideration of environmental risks in Pillar I shall be weighted against already existing Pillar II and macroprudential mechanisms that might already take account of environmental risks. Double counting of environmental risks must be avoided.
Generally speaking, it should be ensured that only new exposures originated after a measure has come into effect or a legal basis has changed are targeted. This would be more risk sensitive and prevent unwarranted risk weight increases.
In this vein, we support the approach taken by EBA that the prudential framework should be based on economic risk. While we do understand the severity of climate change and support the policy target of carbon neutrality in 2050 and the transition path, we believe that the prudential framework of credit institutions is not the best entry point for political initiative and should remain generally risk based.