The ESG Review: Banking watchdog turns up environmental and social heat

 18th October 2023

Regulatory pressure has been increasing on ESG investment for many months now.

Over the past week, a quiet but significant piece of European news tightened the screw further, as the banking sector regulator set out how it will introduce new rules that govern how banks assess corporate client risks and manage capital decisions.

The European Banking Authority chairman, Jose Manuel Campa, stated that it has identified immediate solutions to minimum requirements for the new regulation, covered in ‘Pillar 1’, but that other changes will be introduced gradually, and a few require new legislation. The EBA's recently published report gives more detail.

The EBA said that the move was to address the growing concerns among regulators regarding threats to financial stability posed by ESG factors such as climate change and inequality.

Billing the move as a historic crackdown, Bloomberg outlined why it is a world first that revises the fundamentals of the framework through which banks assess their biggest risks.

The new rules will cover environmental and social factors, not corporate governance. But the obligations placed on European banks will extend to how they assess external credit ratings, and in time due diligence requirements and valuation of immovable property collateral.

Banks would also be required to identify whether environmental and social factors are triggers of operational risk losses, EBA said.

Reuters framed the move as one that “piles pressure on banks to better quantify climate risks”.

It all adds up to banks needing to undertake a much greater level of scrutiny and be more transparent about what they find. And as FinTech Global pointed out in its analysis, it will aim to ensure that due consideration of environmental and social risks becomes part of a “supervision framework” that applies to all European - or at least, EU - banks and investment firms.

Another set of rules, and another squeeze on ESG finance, but the broader ramifications of what the EBA has announced are that the information provided by companies dealing with the banks will need to align to the level of detail and transparency required.

Moreover, it’s a development that does much to set the tone for, and continues to build the momentum behind, environmental and social disclosures in Europe.

The ESG News Review is written by Steve Earl, a Partner at PR agency BOLDT.

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