7-9 September 2022 
Eurofi event 
 
Sustainability risks: work in progress 
We need to enhance the measurement, disclosure, risk management and supervision of ESG risks 
The growing importance of Environmental, Social and Governance (ESG) risks for the EU banking 
sector calls for assertive actions by all stakeholders, including financial institutions and supervisory 
authorities. In view of the potential for ESG risk factors to affect all traditional categories of financial 
risks to which institutions are exposed, ranging from credit risk to market risk through concentration 
and reputational risks, a holistic approach to managing these risks is warranted. We need to enhance 
the measurement, disclosure, risk management and supervision of these risks. We also need to assess 
the prudential treatment of such exposures.  
Firstly, institutions need to enhance the measurement and disclosure of ESG risks. Starting from 2023 
credit institutions will be required to implement clear disclosure of ESG risks on the basis of disclosures 
standards specified by the EBA1. The proposed granular templates and instructions should help 
institutions measure and report some of these risks and facilitate access to meaningful and 
comparable information, allowing stakeholders to assess institutions’ ESG performance and risk 
profile. In this regard, while institutions should enhance their data collection and aggregation 
processes as soon as possible to meet their disclosure (but also risk management) obligations, they 
should also gradually benefit from more reliable information from their clients and counterparts, 
thanks to the EU and international efforts to develop an ambitious ESG disclosure framework. In the 
EU, the Corporate Sustainability Reporting Directive and the EU Taxonomy are expected to improve 
significantly the data provided by non-financial corporates, which will among other things allow 
institutions to calculate and report their green asset ratios. At the international level, the work 
undertaken by the International Sustainability Standards Board to develop a global baseline of 
sustainability-related disclosures should also contribute to better availability of data provided by 
banks’ non-EU counterparts. In this context, the EU emerging standards can help establish best 
practices and drive progress at international level on sustainability risks disclosures.  
Secondly, institutions need to further embed ESG risks into their business strategies, risk management 
frameworks and internal governance arrangements. The explicit integration of ESG risks into various 
EBA Guidelines – on loan origination and monitoring2, internal governance3, remuneration policies4, 
 
1 See EBA Implementing Technical Standards 
2 See EBA Guidelines 
3 See EBA Guidelines 
4 See EBA Guidelines

and supervisory review5 – indicates the overarching nature of ESG considerations. More guidance will 
follow on risk management, potentially covering requirements around institutions’ transition plans 
and stress-testing practices. The recent publications of the Bank of England and ECB climate stress 
tests results confirm the need for banks and supervisors to continue building their capabilities to 
identify and manage these forward-looking risks. These exercises constitute key tools to improve 
banks’ climate risk modelling, pushing them to engage with their counterparties to understand better 
their climate exposures and helping them, and supervisors, sizing the risks. Internally, banks should 
continue to enhance their climate stress testing capacities. Ultimately, banks are expected to 
incorporate considerations on ESG risks into their regular business and risk management.  
Last but not least, environmental risk drivers should be properly captured into the prudential regime. 
This should be grounded in a solid risk-based approach, as prudential regulation should remain geared 
towards ensuring the safety and soundness of institutions. The EBA’s discussion paper6, which 
explores the relevance of targeted amendments to the existing prudential requirements to capture 
these risks more accurately, represents the first step in the assessment of the appropriate prudential 
treatment of exposures subject to environmental risks and impacts. Here again, a holistic regulatory 
approach is needed as on-going developments under the Pillar 2 framework, macroprudential capital 
buffers and accounting rules should be taken into account to design the best prudential response to 
environmental risks. 
The management of ESG risks continues to be work in progress. Progress has been made but more is 
needed. EBA will continue its efforts to provide a robust framework for identifying, disclosing and 
addressing ESG risks by institutions and supervisors. It will also monitor these risks in the EU banking 
sector, including through dedicated and regular stress testing exercises. 
 
5 See EBA Guidelines 
6 See EBA Discussion Paper