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How does the EBA intend on tackling ESG in 2020 and beyond?

How does the EBA intend on tackling ESG in 2020 and beyond?

The European Banking Authority will push for early action on sustainable finance, according to its Action Plan released this week.

With a workplan prioritising key metrics, strategies, and risk management, the EBA will support banks’ green strategies already in place before considering any necessary risk-weight adjustments. 

Jose Manuel Campa, EBA chairperson, says: “The urgent need to act explains why we have also set out early expectations for interim measures, including the identification of simple metrics that can foster market discipline and allow banks to set clear green strategies.”

The rationale for this approach, the Plan holds, is the need to firstly understand institutions’ current business mix from a sustainability perspective in order to measure and manage it with regard to their chosen strategy. These findings can then be used for scenario analysis.

The Action Plan will act as a bellweather for the financial industry, signifying the EBA's policy direction and expectation that ESG factors will affect the business model of institutions, presenting both risks and opportunities.

Implementation of the Paris Agreement and the UN 2030 Agenda for Sustainable Finance among other regulations, will instigate capital flow reorientation and the EBA argues firms must begin preparing proactively. Further, in a strategic review of the ECB’s purpose, the bank’s president Christine Lagarde recently flagged that the central bank would underline action on climate change as a fundamental component of monetary policy.

The EBA outlines three key factors driving the need for early action:

  1. Long lead-time on EBA mandates may cause policy makers and the public to perceive a lack of specific action on the areas targeted by the Action Plan;
  2. The EBA seeks to gain insight from approached developed and taken by institutions in the industry to inform the EBA’s finalised legal mandates; and
  3. New requirements such as disclosure metrics will work to inform participants across the market as to the context and relevance of this data in the preparation of legal mandates.

Elena Philipova, global head ESG proposition at Refinitiv recently told Finextra: “European regulators are leading the way with the most comprehensive and ambitious plans put forward thus far on transitioning capital markets to be sustainable and finance the 2030 Agenda. This top down pressure is making all market participants, large and small, elevate sustainability to the top of their priorities.”

The ability to measure ESG risk is a key priority for 97% of institutions when determining how to weight their investment portfolio, a recent report by State Street found. The report notes that investors need the right data to make the right ESG decisions and yet the current state of ESG data is a substantial hindering factor to adoption.

Chief responsible investment officer at Aviva Investors, Steve Waygood, told Bloomberg that “it’s only when capital flows start to reflect climate risks that we will start to shape the future we wish to retire into. At the moment I think sustainability remains the world’s biggest market failure, and we need the markets to be corrected. While the ‘revolution’ has started we have a long way to go before the incentives in the systems are aligned.”

Considering the given and planned mandates of the EBA from legislation and the Commission’s action plan, the complexity of the topic and the deadlines, the Actions Plan states that EBA is expected to deliver a significant amount of work between 2019 and 2025.

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