Benchmarking of National ESG Banking Regulations: State of Art and Remaining Challenges

This article describes the contents of banking regulations that address ESG (environmental, social and governance) issues globally, analyses them critically, points out some inconsistencies and remaining gaps, and concludes with recommendations for further improvement. It includes only regulations or guidance issued by banking regulators/supervisors, not market self-regulatory initiatives. The topics addressed by banking regulations herein described include: (a) the definition of relevant environmental, social and climate issues; (b) the characteristics of a sound environmental and social and climate risk management (encompassing the definition of the universe of relevant transactions and customers, criteria for the identification of the risks, due diligence processes and data sources for the identification of risks, consequences of risk assessment, risk mitigation, monitoring, classification and reporting, risk management at portfolio level and scenario analysis, integration into traditional risk categories, risk assessment for new financial products); (c) the definition of positive environmental and social impacts that can be generated by financial products (without approaching green taxonomies); and (d) governance issues that are required from financial institutions to manage environmental and social risks and opportunities properly (including the definition of roles and responsibilities, staff dimension and capacity-building, budget, integration of ESG factors into compensation schemes, mapping and communication with stakeholders, business strategy and target-setting, principle of proportionality, timeframe for implementation of policies, effects of voluntary commitments, periodic review of policies, environmental and social impacts of banks own operations). It concludes with recommendations for further regulatory actions and for a minimal content of a sound ESG banking regulation.