Banks in the European Union must have a 10-year plan spelling out how they will deal with environmental, social and governance (ESG) risks to their bottom line, according to the European Banking Authority (EBA).
According to the report, banks should plan strategically over a period of at least 10 years to show their resilience to different scenarios, disclose strategic ESG objectives, and assess the need to develop sustainable products.
Climate risks can include physical, weather-related events like floods, and ‘transition’ risks from sudden changes in asset values.
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 which regulates top euro zone lenders will use the report from the end of 2022 for updating its annual “SREP” review of whether banks hold enough capital to cover risks on their books.
All EU banking supervisors will be required to apply the report or explain any gaps.
“We 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,” said Fabien Le Tennier, a policy expert in EBA’s ESG Risks unit.
Banks typically plan strategically for up to five years ahead at present.
“Most of our recommendations will not come as a surprise for banks, but there will probably be a challenge for banks to meet all of them, at least in the near term,” Le Tennier said.
The EBA’s proposals come in the same week as proposals from the UK’s financial regulator on climate change disclosure.
The Financial Conduct Authority (FCA) this week published new proposals on climate-related disclosure rules for listed companies and certain regulated firms saying the current rules do not meet the needs of investors of clients.
The proposals follow the introduction of climate-related disclosure rules for the most prominent listed commercial companies in December 2020 which are aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).
In the consultations the FCA is proposing:
> to extend the application of its TCFD-aligned Listing Rule for premium-listed commercial companies to issuers of standard listed equity shares.
> to introduce TCFD-aligned disclosure requirements for asset managers, life insurers, and FCA-regulated pension providers, with a focus on the information needs of clients and consumers.
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