Banks in the European Union must have a 10-year plan about their way of dealing with environmental, social and governance (ESG) risks to their bottom line, the bloc’s banking watchdog said.
Climate-friendly investment gets increasing money. Regulators want investors to have a reliable snapshot of a company’s green credentials. European Banking Authority gave a report stating to set out recommendations for banks and their supervisors. This is to approach ESG risks and to help the EU to meet its goals of cutting carbon emissions by 2050. Banks should plan over a period of at least 10 years. So that they can show their resilience to different scenarios, disclose strategic ESG objectives, and assess the need to develop sustainable products.
Climate risks can be physical or weather-related events, and transition risks from sudden changes in asset values. The EBA report looks at the second pillar of core banking rules that assess how risks at a lender are managed. Guidance for the third pillar relating to disclosures of risks later in the year, is expected to set out. The report builds on existing EU initiatives such as a taxonomy that defines a sustainable product, and disclosure rules for all types of companies. The European Central Bank that is regulating the top euro zone lenders will use the report from the end of 2022. And this is for updating its annual “SREP” review.
All EU banking supervisors will be required to apply the report. Fabien Le Tennier, a policy expert in EBA’s ESG Risks unit said that they are putting an initial emphasis on climate-related risks as data is more advanced. But banks should also advance their identification and understanding of social and governance risks. Banks plan for up to five years ahead at present. Le Tennier said that most of their recommendations will not come as a surprise for banks. But there will probably be a challenge for banks to meet all of them.