As part of the European Banking Authority’s (EBA’s) action plan on sustainable finance, it will initially focus on key metrics and disclosure to support bank’s green strategies.
Sustainable finance is financing which generates strong, sustainable, balanced and inclusive growth through the support of sustainable development goals.
The European regulator has published its action plan on sustainable finance, charting its approach and timeline for meeting mandates related to environmental, social and governance (ESG) factors. Its plan explains a sequenced approach starting with key metrics, strategies, risk management and moving towards scenario analysis and evidence for adjustments to risk weights.
Climate change and the response in society is having a rising impact on the financial market, the EBA said. This has made it crucial for financial institutions to measure and monitor ESG risks to help cope with transition and physical risks.
While the risks are unclear, the EBA has encouraged financial institutions to incorporate ESG factors into their business strategies. Additionally, it states they should identify any ESG risks such as a green asset ratio. By doing this they can use scenario analysis to see the potential affect of these factor.
To help with this, the EBA will implement its sequencing strategy into legal framework and focus on strategy and risk management associated key metrics and disclosure. Following this, it will create a dedicated climate change stress test.
The third stage of its work will see the EBA explore evidence surrounding the prudential treatment of green exposures.
EBA chairperson Jose Manuel Campa said, “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 EBA will publish reports, guidelines and technical standard, as well as incorporate ESG consideration into its risk analysis work.
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