We would recommend the EBA to start the work given that the timing of the forthcoming social taxonomy is late vis-à-vis ongoing ESG-implementation in banks.
Yes, we agree with the EBA’s assessment.
We mainly see environmental risks as being about reallocation between sectors but it is difficult to predict the development. For the time being we do not see environmental risks that imply an increase in the overall risk.
Meaningful and comparable data will be key for institutions in evaluating the risks of their customers. In this regard, the draft European Sustainability Reporting Standards (ESRS) under consultation until August 8 is foreseen to be a cornerstone, but at first glance they seem too comprehensive – at least for the first years of reporting. A phased-in approach is in our opinion needed with focus on key information on environmental data, including CO2 emissions etc., that can be attributed to requirements for the financial sector in SFDR, CRR, etc. Furthermore, ESAP could be a useful instrument starting with environmental data.
In addition, the relationship between the EU taxonomy and riskiness is not coherently discussed. The taxonomy has not been built from a risk correlation perspective and it’s not clear that there will be correlation going forward. E.g., taxonomy- based reporting may not provide sufficient data for risk modelling.
We agree that a prudential risk-based perspective should underlie the assessment. A risk-based approach is key to the prudential regulation and that’s why we strongly object to the introduction of the floor in the Basel package.
We need more guidance on physical collateral, especially regarding short term vs. long term risks. Common methodologies that take into account the long durations of some exposures would be preferred. We find it difficult to include the longer time horizons appropriately in the Pillar 1 framework. Instead, stress testing and scenario analysis are beneficial tools to help understand environmental risks considering their forward-looking horizons.
We find it difficult to include the longer time horizons appropriately in the Pillar 1 framework. Instead, stress testing and scenario analysis are beneficial tools to help understand environmental risks considering their forward-looking horizons.
As users of credit ratings, it is very important to understand to what extent individual credit rating actions have been influenced by sustainability factors. The level of disclosure of information from rating agencies as to the effect of sustainability factors on credit ratings has improved since the entry into effect of the ESMA Guidelines in 2020. We see much larger challenges in the ESG ratings market with lack of transparency regarding methods used.
The CRR3 proposal does partially incorporate risk sensitivity in the exposures secured by immovable properties since energy efficiency is one of several factors affecting the value of the property. Improved energy efficiency improves the value of the property but other factors including ESG factors will also influence the value in a positive or negative direction. Thus, further granularity of risk weights according only to energy efficiency will not be a risk-based approach and might lead to untended consequences. ESG risks should be “picked up” through the valuation of the asset.
We do not think that further risk differentiation is justified for the time being, we need more evidence of ESG as a risk driver before differentiation can be justified. We also see a risk of double counting.
Sufficient flexibility around the IRB integration should be allowed to enable integration into different modelling approaches with further guidance on supervisory expectations for a stepwise approach to IRB integration. In addition, the introduction of the output floor will mute the risk sensitivity of the capital requirements for IRB, also when it comes to environmental factors. Making the transitional arrangements for mortgages and unrated corporates in CRR3 permanent would enable risk differentiation through the model outcomes as well.
The possibility to directly include ESG factors as explanatory variables in the asset valuation models could be further considered.
It is important that the prudential framework remains risk-based. Environmental factors can be integrated into existing Pillar 1 instruments where there is sufficient evidence that those factors are risk drivers.
We do not find it necessary to introduce new concentration limits. However, if limits should be imposed it is important not to set the limits too hard. To support the transition, we will see large exposures to sectors e.g., working on renewable energy so we should be careful not to limit the exposures. It could hamper the transition.