Guidelines on ESG risks management

The European Banking Authority (EBA) has published for consultation new guidelines on ESG risk management, with a final version expected by the end of 2024.

Guidelines on ESG risks management

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Executive summary

The EBA has published for consultation its guidelines on ESG risk management. The document sets out the requirements that the EBA believes institutions need to meet in order to identify, measure, manage and monitor ESG risks.

Regarding risk identification, it provides guidance on the materiality analysis of risks and emphasizes data quality and systematization. Furthermore, the proper management of ESG risks requires their integration into the overall risk management framework, strategy, business plans, risk appetite and corporate risk culture. Finally, institutions should develop prudential transition plans to address the risks arising from the transition and adjustment process towards ESG-related regulatory objectives in the jurisdictions in which they operate.

Main content

• Reference methodology for ESG risk identification and measurement. In accordance with the materiality standards, institutions are required to conduct ESG risk assessments at least annually to integrate risk identification and measurement into their internal strategies and processes, as part of the Internal Capital Adequacy Assessment Process (ICAAP). These assessments cover all categories of financial risk and focus on high climate contributing sectors over short, medium and long-term horizons. Qualitative and quantitative data should be used to assess impacts on significant activities, services and products under different climate scenarios. Systems for ESG risk data collection and aggregation should be implemented, ensuring data quality and capturing data for ESG risk profiles of counterparties.
• Minimum standards and reference methodology for ESG risk management and monitoring. Incorporation of ESG risks within the regular risk management framework, systems and processes, ensuring consistency with overall business and risk strategies. Business strategies should incorporate ESG considerations and clearly define risk appetite, while fostering a culture of awareness and empowerment within the entity.
• Transition plans. Transition plans, according to CRD 6, should address key aspects: ESG risk mitigation in portfolios and exposures, establishing short, medium and long-term objectives aligned with business strategy and economic capital. In addition, an appropriate ESG risk governance framework should be established and metrics at sector/portfolio level with different time horizons and under different scenarios should be established.

Download the technical note on Guidelines on ESG risks management.