EU Authority Drafts Guidelines for Banks to Manage ESG Risks
EU Authority Drafts Guidelines for Banks to Manage ESG Risks | OilPrice.com
EU Authority Drafts Guidelines for Banks to Manage ESG Risks
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European banks should integrate environmental, social, and governance risks in their regular risk management framework, the European Banking Authority (EBA) said this week in draft guidelines on the management of ESG risks.
The European authority published a consultation paper on its draft proposals for banks as it launched a public consultation that will run until April 18, 2024.
According to the EBA, climate change, environmental degradation, social issues, and other ESG factors pose “considerable challenges for the economy that impact the financial sector.”
“The risk profile and business model of institutions may be affected by ESG risks, in particular environmental risks through transition and physical risk drivers,” the authority noted.
The management of ESG risks is still at early stages and a “work in progress” in most EU institutions, the banking authority said in the paper.
Despite the fact that some institutions have taken action in recent years, “several shortcomings have been observed in the inclusion of ESG risks in business strategies and risk management frameworks that may pose challenges to the safety and soundness” of banks, the authority added.
However, the EBA noted that while the ESG risk guidelines call for more planning and including ESG factors in risk management, “It is also important to bear in mind that the goal of prudential plans is not to force institutions to exit or divest from carbon intensive sectors.”
Banks across Europe may have to include environmental and social risks in their capital requirements and risk management under new recommendations by the EBA published at the end of last year.
“Environmental and social risks are changing the risk profile for the banking sector and are expected to become more prominent over time,” the authority said in a report in October.
Among other things, the EBA is proposing to require institutions to identify whether environmental and social factors constitute triggers of operational risk losses.
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By Charles Kennedy for Oilprice.com
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Related Knowledge Center: Climate economics
Climate change is now a driver of the world’s economy. The impact is profound:
- Catastrophic weather events — hurricanes, floods, droughts, high temperatures — are more frequent and more extreme. The cost can be measured in both the initial damage caused and the longer-term impact on the economy.
- Vulnerable communities are increasing climate-related investments, hardening infrastructure and taking other protective measures.
- Investment in carbon capture and storage technologies is increasingly rapidly.
- Governments are making investments and crafting regulations to reduce emissions of carbon dioxide and other greenhouse gases.
On top of all of this is the cost of uncertainty. As the Fourth National Climate Assessment, released in 2018 by the U.S. Global Change Research Program, says, “The assumption that current and future climate conditions will resemble the recent past is no longer valid.”