Prudential Requirements for ESG Risks of Banks

With the 2030 Climate Target Plan, the Commission proposes to increase the EU’s ambition to reduce greenhouse gas emissions to at least 55% below 1990 levels by 2030. This increase in ambitions as set out in the original 2018 plan also affects the financial sector in many ways. For the banking sector, the new targets have already led to the introduction of far-reaching transparency obligations. Besides the issue of transparency, there are other developments of importance for the banking sector. The qualitative risk management organisation of banks needs to be radically adapted to meet the standards launched by the various authorities. These include the ECB Guide on climate-related and environmental risks, the European Banking Authority’s major 2021 study and the Basel Committee's principles on qualitative risk management and the role of the supervisor published in the first half of 2022. With the adoption of the Banking Package 2021 proposals on revisions to the Capital Requirements Regulation and Directive, further elements will be added to the regulatory framework to introduce, apart from qualitative risk management rules, also quantitative capital requirements in the form of bespoke rules to be added over time to the calculation of the Total Risk Exposure Amount of banks. EBA conducted important preparatory work to establish such further rules. It is noted that developments in laws, regulations and policies applied by supervisors follow a reverse order to some extent. Banks should anticipate on these developments and come up with independently and in-house developed refinements to existing risk management, risk management strategies and how banks will (be able to) respond to the financial-economic impact of climate and environmental risks thus identified.