August 2, 2022
European Banking Authority
Tour Europlaza, 20 avenue André Prothin,
CS 30154, 92927 Paris La Défense CEDEX, France
Japanese Bankers Association

JBA comments on the EBA Discussion Paper: “The Role of Environmental Risks in
the Prudential Framework”
Dear Sirs/Madams:
The Japanese Bankers Association 1 (JBA) appreciates the opportunity to provide our comments on theEuropean Banking Authority’s (EBA) discussion paper: “The Role of Environmental Risks in the prudential
framework” (hereafter the “DP”) on May 2, 2022. It is one of the most prioritized topics not only within theEuropean Union but globally to incorporate ESG risks to financial institutions’ business strategy and risk
management framework. The JBA welcomes EBA’s work on ESG risks, including definitions, methodologies,
banks’ risk management framework, and monitoring by regulators, based on the mandate from the European
Commission and relevant regulations/directives.
The JBA member banks, as non-EU financial institutions, have operations in the EU. We hope our comments
will contribute to the policy debate going forward. In addition to the responses we have made to specificquestions, we would like to provide some high-level comments as follows.

General comments
Financial institutions are making progress in developing management framework of climate-related financial
risks. Recently, some regulators have begun to examine the relationship between climate-related financial risks
and the regulatory capital framework, such as the Network of Central Banks and Supervisors for Greening the
Financial System (NGFS)2, Financial Stability Board (FSB)3, and Bank of England4. The Basel Committee on
Banking Supervision (BCBS)5 is also assessing the gap between the current Pillar 1 framework and climaterelated financial risks. These exercises are mainly focusing on climate-related financial risks, however, the DP
expands its scope on environmental objectives and provides insights about how environmental risks are to be
1

The Japanese Bankers Association is the leading trade association for banks, bank holding companies and bankers associations inJapan. As of August 2, 2022, JBA has 114 Full Members (banks), 3 Bank Holding Company Members (bank holding companies), 77
Associate Members (banks & bank holding companies), 58 Special Members (regionally-based bankers associations) and one SubAssociate Member for a total of 253 members.
2 “Capturing risk differentials from climate-related risks: A Progress Report”, May 19, 2022 (https://www.ngfs.net/en/capturing-riskdifferentials-climate-related-risks-progress-report)
3 “Supervisory and Regulatory Approaches to Climate-related Risks: Interim Report”, April 29, 2022 (https://www.fsb.org/20
22/04/supervisory-and-regulatory-approaches-to-climate-related-risks-interim-report)
4 PRA Climate Change Adaptation Report, October 28, 2021 (https://www.bankofengland.co.uk/prudential-regulation/publicati
on/2021/october/climate-change-adaptation-report-2021)
5 Remarks by Pablo Hernández de Cos, Chair of the Basel Committee on Banking Supervision and Governor of the Bankof Spain, titled “A resilient transition to net zero” delivered at the International Economic Forum of the Americas, 28th edition of the Conference of Montreal, July 11, 2022 (https://www.bis.org/speeches/sp220711.htm)

1incorporated into the Pillar1 framework. In this context, we believe that the consultation of the DP may havea broader implication for future global discussions.
We would like to express our general support for the EBA’s following approaches taken in the DP:- Prudential regulation should remain risk-based and evidence-based to maintain robustness of theprudential framework, and the prudential framework should not be used to achieve specificenvironmental objectives.
- Pillar 1 own funds requirements do not intend to cover all existing risks, and the EBA highlights theneed for a holistic regulatory approach, including Pillar 2.
- Targeted amendments to the existing prudential framework would address the environmental risks moreaccurately than dedicated risk-weight adjustment factors. Any further adjustment should be designed ina way that avoids double counting, to ensure the framework’s consistency and robustness.
Challenges due to the environmental risks
The JBA also appreciates the EBA’s recognition of challenges regarding the data gaps, time horizon, andforward-looking nature associated with environmental risks. Therefore, we agree with the EBA’s view thatemphasis at this stage should be on environmental-risk-related data collection and ensuring that institutions’risk management tools and practices explicitly consider environmental risks.
Importance of globally standardized framework
The JBA would like to ask the EBA to consider the alignment with other international discussions being madeat the BCBS, the FSB, and the NGFS etc., and to continue close engagement with the global industry
stakeholders during their work before finalizing the DP by 2023.
Specific comments
Please refer to each answer/comment to the questions provided in the designated format.
***

We thank again the EBA for the opportunity to comment on the DP and hope our comments will contribute tofurther consideration in the EBA.
Yours faithfully,
Japanese Bankers Association

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EBA DISCUSSION PAPER "THE ROLE OF ENVIRONMENTAL RISKS IN THE PRUDENTIAL FRAMEWORK"
Chapter 3 – Background and rationale
Question

Comment
With regard to social objectives, the scope is broad and many quantitative assessments are at an early stage. Moreover, data availability andmethodologies for social objectives are much more premature than environmental risks, and the relationship between social objectives of a corporate
and/or social impacts caused by corporate activities and the financial impact of the corporate cannot be quantitatively demonstrated.

Q1: In your view, how could exposures associated with social We recognize that there is a consensus that climate-related financial risks can be managed within the existing comprehensive risk management
objectives

and/or subject to social impacts, which are framework as a result of the active global discussions held prior to discussions on social objectives and social impacts at forums such as the Network

outside the scope of this DP, be considered in the prudential for Greening the Financial System (NGFS) where authorities from various jurisdictions participate. On the other hand, discussions on social objectives
framework?

Pleaseprovideavailable

evidence

and and social impacts have not yet matured in international organizations such as the NGFS.

methodologies which could inform further assessment in that Therefore, before expanding the scope of risks to be considered in the prudential framework, it is necessary to conduct an objective analysis to identify
regard.

transmission channels and to examine whether it is possible to consider social objectives and social impacts in the framework of comprehensive risk
management or whether a different approach is necessary.
The world should gain experience from an approach toward climate-related risks first and the lessons learned should be leveraged to discuss otherenvironmental risks and social objectives.

Chapter 4 – Principles, premises and challenges
Question

Comment
We agree with the EBA's view:-

Q2: Do you agree with the EBA’s assessment that liquidity
and leverage ratios will not be significantly affected byenvironmental risks? If not, how should these parts of theframework be included in the analysis?

As per the EBA's view, a leverage ratio is a non-risk-based measure, and therefore has no direct relationship with environmental risks and does
not need to be considered.

-As for liquidity, the Liquidity Coverage Ratio (LCR) is a standard requiring banks to hold high quality liquid assets to cover "cash outflows over the
30-day stress period," and as per the EBA's view, LCR will not be materially affected by environmental risks that are expected to have mediumto long-term impacts.

However, because the analysis and verification of liquidity risk have not progressed sufficiently, it is too early to conduct a definitive assessment of
this risk. Therefore, we believe it is necessary to accumulate the results of objective risk analysis. We also believe that careful consideration should
be made, taking into account international discussions by the Basel Committee on Banking Supervision and other global standard setting bodies.
Although there are no established measurement methodologies for forward-looking environmental risks nor sufficient objective analyses of the amount

Q3: In your view, are environmental risks likely to be of risks in the overall financial system and the level of capital charge for financial institutions, environmental risks will depend on the climate change
predominantly about reallocation of risk between sectors, or scenario. Appropriate global progress in reducing GHG emissions would result in a limited increase in overall risk, as well as in reallocation of risks
does it imply an increase in overall risk to the system as a between sectors. If GHG emissions reductions do not progress smoothly, this would result in an increase in overall risk.
whole? What are the implications for optimum levels of bank The timing and process of achieving carbon neutrality varies from sector to sector, and in the process of transition as a whole, the amount of credit
capital?

risk may increase due to capital investment and other activities, regardless of whether emissions decrease or not. When considering the optimum
capital level, it should be noted that such credit risk is managed within the normal credit risk management framework.

1Question

Comment
The future impact of the environment on a company (i.e. financial materiality) would be incorporated into the prudential framework, but it is difficult to

Q4: Should the ‘double materiality’ concept be incorporated
within the prudential framework? If so, how could it beaddressed?

define the scope of measurement of the impact. In addition, incorporating the impact of company's activities on the environment (i.e. environmental
materiality) into the prudential framework would not be appropriate because it is unclear how and in which risk category such risk is to be measured.
Therefore, it is difficult to incorporate the concept of double materiality into the prudential framework.

Enhancing the quality and quantity of disclosures of clients' risk information is essential for improving availability of meaningful and comparable data
Q5: How can availability of meaningful and comparable data be
improved? What specific actions are you planning or would
you suggest to achieve this improvement?

at financial institutions. We believe that close cooperation between financial regulators and non-financial industry authorities is important to address
the data challenges, and it is also desirable to create common data templates on a global basis.
In the financial sector, some industry associations are working on the data templates and there are efforts related to the establishment of a data
platform announced by the Glasgow Financial Alliance for Net Zero as well as the data gap initiative of the NGFS. Globally consistent approach would
be appreciated.
We are supportive of the approach of the EBA in so far as it concludes that environmental risks should be reflected within the existing prudential

Q6: Do you agree with the risk-based approach adopted by framework, rather than through the introduction of specific green supporting /brown penalizing factors. We also agree with the EBA’s view that a riskthe EBA for assessing the prudential treatment of exposures based approach should be adopted. We believe that the prudential framework should remain fundamentally risk-oriented and the risk should be
associated with environmental objectives / subject to accurately measured according to the actual amount of risk when assessing these investments and lending whether for environmental objectives orenvironmental impacts? Please provide a rationale for your other objectives.
view.

When considering the reflection of environmental risks in prudential regulation and credit ratings, etc. under the risk-based approach, we would like torequest that EBA consider reflecting such risks based on a time horizon that takes into account the development of international discussions.
We believe that the Pillar 1 own funds requirements do not need to be changed from the current short-term time horizon. As noted in Para 43(c), if
risk were to be measured on a long-term time horizon, it should reflect changes in the balance sheet of individual financial institutions and changes inthe external environment over time. However, this would require future projections, which would be difficult to implement in practice. Even if such a

Q7: What is your view on the appropriate time horizon (s) to measurement were to be made, the inclusion of forecasts would increase the uncertainty in risk measurement results and make it impossible to ensure
be reflected in the Pillar 1 own funds requirements?

comparability.
If the forward-looking element of environmental risks is to be reflected in Pillar 1, the concept of Pillar 1 in Basel Framework itself would need to bechanged. Therefore, we believe that careful consideration is needed to agree on the rationale for reflecting only the environmental risk factors of ESG
in Pillar 1 as a global standard and to establish measurement methodologies for credit risk based on objective evidence and analyses.

Chapter 5 – Credit risk
Question

Comment
Risks that will materialize in the short-term period have already been included and evaluated in credit ratings.

Q9: Have you performed any further studies or are you already However, ESG factors such as climate change risk need to be evaluated from a longer-term perspective and due to the lack of globally establishedusing any specific ESG dimensions to differentiate within standards, they have not yet been reflected in specific credit ratings.
credit risk? If so, would you be willing to share your results?

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Question

Comment
The lack of standardized data templates and development stage of companies in disclosures could be considered as challenges. Also, it is difficult toQ10: What are the main challenges that credit rating agencies verify the correlation and dependence between environmental risks and PD due to the lack of historical data and this could be considered as challenging
face in incorporating environmental considerations into credit as well.
risk assessments? Do you make use of external ratings when Furthermore, there is no global standard of the time horizon in which environmental risks should be considered.
performing an assessment of environmental risks?
There are following challenges in reflecting environmental risks in credit risk methodologies:

Q11: Do you see any challenge in broadening due diligencerequirements to explicitly integrate environmental risks?

-

the lack of established global standards;-

the extent to which environmental risks that have forward-looking nature should be integrated into current credit risk assessments; and-the lack of time-based and historical data.

We recognize that it will take time to establish a quantitative risk management framework and these challenges should be considered in integrating
environmental risks into due diligence requirements.
Environmental risks should be incorporated in credit risk management and due diligence requirements in a consistent way with international discussions.

Q12: Do you see any specific aspects of the CRM frameworkthat may warrant a revision to further account forenvironmental risks?

There is not enough data at this point for incorporating transition risk into the CRM framework, such as medium- to long-term impacts by, for example,
regulatory changes, but we believe that physical risk has been incorporated to a certain extent.
On the other hand, there are not many collateral assets affected by environmental risks to consider changing the CRM framework, and therefore theCRM framework should not be immediately changed.

Q13: Does the CRR3 proposal ’ s clarification on energy Further analysis is needed as the correlation between the energy efficiency and sales prices of mortgages vary by region and country. Therefore, we
efficiency improvements bring enough risk sensitiveness to believe that careful consideration should be given to the introduction of this proposal. In addition, we believe that further granularity of risk weights by
the framework for exposures secured by immovable energy efficiency should be considered only when a correlation is identified between the two as a result of the above analysis.
properties? Should further granularity of risk weights beintroduced, considering energy-efficient mortgages? Please
substantiate your view.
Q14: Do you consider that high-quality project finance andhigh-quality object finance exposures introduced in the CRR3

If PDs and LGDs of project and object finance may change depending on future environmental factors, then we believe that environmental criteria
should be considered, but objective analytical results are needed to support that they may change.

proposal should potentially consider environmental criteria? If
so, please provide the rationale for this and potential
implementation issues.
As stated in Section 5.1, no risk differentiation between green and environmentally harmful assets has been identified at this time. Therefore, risk
Q15: Do you consider that further risk differentiation in thecorporate, retail and/or other exposure classes would be

differentiation should not be considered. If risk differentiation is to be considered based on forward-looking analytical tools, objective analytical results
are necessary.

justified? Which criteria could be used for that purpose? Inparticular, would you support risk differentiation based on
forward-looking analytical tools?

Q16: Do you have any other proposals on integrating
environmental risks within the SA framework?

Risk weights are evaluated based on external ratings within the SA framework and we recognize that credit rating agencies are at the stage ofconsidering incorporating environmental risks into external ratings. Therefore, it is unnecessary and unreasonable to consider other methodologies
than external ratings.

3

Question

Comment
We think that the risk measurement models in the current IRB framework are measured based on observed losses and are not developed to capture

Q17: What are your views on the need for revisions to the IRB
frameworkoradditional

guidancetobettercaptureenvironmental risks? Which part of the IRB framework is, inyour view, the most appropriate to reflect environmental
risk drivers?

risks for long-term horizons in mind.
Some accounting standards require the measurement of PDs and LGDs based on past performance with a reasonable estimation method even on along-term horizon when measuring conventional risks. However, we recognize that environmental risks have not accumulated enough actual
performance to enable a reasonable estimation of PDs and LGDs both in the short and long-term. Therefore, it is necessary to accumulate many
assumptions in order to estimate them, and we believe that it is very difficult to incorporate them into the IRB framework at present.
A complementary framework to the limitations of evidence-based Pillar1 is the Pillar 2 framework of scenario analysis and stress testing, and we thinkthat the role of each pillar for capturing environmental risks should be distinguished.

Q18: Have you incorporated the environmental risks or

We do not explicitly incorporate environmental or ESG risk factors as parameters in the IRB model.

broader ESG risk factors in your IRB models? If so, can you
share your insight on the risk drivers and modelling techniquesthat you are using?
Q19: Do you have any other proposals on integrating
environmental risks within the IRB framework?

Q20: What are your views on potential strengthening of theenvironmental criterion for the infrastructure supporting

At this point, we believe that data collection should be prioritized.
Appropriate methodologies should be identified according to the results of analysis based on objective data collected in the future.

We believe that consideration on whether the environmental criterion for the infrastructure supporting factor should be strengthened or not based on
an objective analysis of correlation between the environmental criterion and credit risk.

factor? How could this criterion be strengthened?
We are supportive of the approach of the EBA in so far as it concludes that environmental risks should be reflected within the existing prudential
framework, rather than through the introduction of specific green supporting /brown penalizing factors. We are also supportive of the EBA’s view that
Q21: What would in your view be the most appropriate from a highlights the need for a holistic regulatory approach, which includes not only Pillar 1 but also Pillars 2 and 3.
prudential perspective: aiming at integrating environmental In our view, the Pillar 1 framework (as well as Pillar 2) already includes mechanisms that allow for the inclusion of new types of risk drivers such as
risks into existing Pillar 1 instruments, or a dedicated those related to environmental risks. These include internal models, external credit ratings and valuations of collateral and financial instruments. We
adjustment factor for one, several or across exposure agree with the EBA’s view that targeted amendments to the existing prudential requirements in a risk-based and evidence-based way would addressclasses? Please elaborate.

these risks more accurately.
As noted in the DP, we agree that whatever methodologies are introduced, data and methodologies for quantifying environmental risks do not exist at
this time, and therefore we believe that data collection should be prioritized.
Environmental risks (ESG risk) are risk drivers for each risk category. When counting by IRB and other approaches, double counting is considered

Q22: If you support the introduction of adjustment factors totackle environmental risks, in your view how can double
counting be avoided and how can it be ensured that thoseadjustment factors remain risk-based overtime?

unavoidable because environmental risks (ESG risk), which are reflected in inputs to IRB as they materialize, are incorporated into observation data at
some point in the future.
In order to eliminate this duplication, it is necessary to identify those directly linked with environmental risks from PDs and LGDs and adjust for the
duplication, but this is technically and practically very difficult.
Therefore, we believe that careful discussion is needed before introducing adjustment factors.

Chapter 6 – Market risk
Question

Comment4

Question

Comment
While we believe that capturing the risks in the RRAO framework will be one of the options, we believe that when new methodologies or new risk

Q23: What are your views on possible approaches toweights are introduced, results of objective analysis and a rationale for introduction are necessary.

incorporating environmental risks into the FRTB Standardised
Approach? In particular, what are your views with respect tothe various options presented: increase of the risk-weight,
inclusion of an ESG component in the identification of theappropriate bucket, a new risk factor, and usage of the RRAO
framework?
Q24: For the Internal Model Approach, do you think that In the current situation where there is no clear-cut risk factor for ESG risk, we do not think the environmental risks should be captured in the generalenvironmental risks could be better captured outside of the market-risk VaR, and it would be more realistic to consider environmental risks outside of the model. If environmental risks were to be taken intomodel or within it? What would be the challenges of modelling account for market risks, further study for measurement methodologies are necessary. As stated in the DP, environmental risks are captured to aenvironmental risks directly in the model as compared to certain extent in the model (Para. 171), and there are studies showing that climate change risk is incorporated into market prices (Para. 172). Therefore,
modelling it outside of the internal model? Please describe separately accounting for climate change risk outside of the model may result in double counting of risks. Therefore, we believe that carefulmodelling techniques that you think could be used to model consideration is necessary for its introduction.
ESG risk either within or outside of the model.
We believe that it is important to advance the understanding of the impact of environmental risks that have a forward-looking nature through the
Q25: Do you have any other proposals on integrating accumulation of analytical results from scenario analysis and stress testing. In addition, as it will take time to establish a methodology for quantifying
environmental risks within the market risk framework?

climate-related market risks, discussions should be essential regarding such methodologies.

Chapter 7 – Operational risk
Question

Comment
At present, as noted in Para. 187 of this DP, there are no criteria for determining which loss events that have occurred are attributable to environmental

Q26: What additional information would need to be collected risks, making it difficult for individual banks to identify them. For example, it is difficult for individual banks to assume transmission channels of impacts,in order to understand how environmental risks impact banks’ such as an outbreak of an epidemic due to rising temperatures. In addition, even if each loss event is attributable to environmental risks, it is likely
operational risk? What are the practical challenges to that some portion of the loss event is attributable to factors other than environmental risks. In such cases, it is also difficult to identify the breakdown
identifying environmental risk losses on top of the existing loss showing how much of one loss event is attributable to environmental risks.
event type classification?

Therefore, it is important to establish some clear taxonomies that take into account the complexity of such transmission channels in order tocomprehensively and properly capture environmental factors included in the existing loss event type.

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Question

Comment
We recognize that integrating a forward-looking perspective is increasingly important. On the other hand, given the uncertainty of occurrence and thecomplexity of transmission channels, it is necessary to establish some rules/criteria from the perspective of ensuring comparability between banks
when forward-looking perspectives are integrated into the operational risk framework. As for the Standardized Approach, in particular, it should be
noted that there might be a difficulty in comparing risk capital among banks without any clear rules.

Q27: What is your view on potential integration of a forwardlooking perspective into the operational risk framework to
account for the increasing severity and frequency of physicalenvironmental events? What are the theoretical and practical

It may also be appropriate to use the method of estimating the increase rate of the future operational risk loss events attributable to environmental
risks through a scenario analysis. However, since the results of scenario analysis depend on what scenarios are applied it is necessary to ensure thecertainty of the scenarios.
In addition, it should be noted that the uncertainty of the predictions may lead to overly conservative risk assessments and costly countermeasures.

challenges of introducing such a perspective in theStandardised Approach?

We agree with the EBA’s view that strategic and reputational risks should remain captured in the Pillar 2 framework. We believe that the establishment
Q28: Do you agree that the impact of environmental risk
factors on strategic and reputational risk should remain underof a global consensus on the significance of the impact of environmental risks on strategic risks and reputational risks and the transmission channelsof those risks will enable the inclusion of environmental risks in Pillar 2.

the scope of the Pillar 2 framework?
Since the majority of environmental risks from an operational risk perspective is considered to overlap with the risk that disasters and epidemics pose
Q29: Do you have any other proposals on integrating to business continuity, we believe that it would be more efficient to capture both risks in an integrated manner. In addition, we believe that some wellenvironmental risks within the operational risk framework?

founded prediction regarding the extent to which operational risk will increase in the process of future climate change is necessary, but we believethat it is very difficult to accurately predict.

Chapter 8 – Concentration risk
Question

Comment
We think that concentration risks stemming from environmental risk drivers could be addressed by upgrading the existing framework, such as reducing

Q30: What, in your view, are the best ways to address credit cost accruals through transition plans and FE reduction targets set by financial institutions, and managing RAF based on environmental risk
concentration risks stemming from environmental risk drivers? (ESG risk).
LEX regulation is designed as a tool for limiting the maximum loss a bank could face in the event of the sudden default of a single counterparty or a
Q31: What is your view on the potential new concentration
limit? Do you identify other considerations related to such alimit? How should such a limit be designed to avoid the risk of
disincentivising the transition?

group of connected counterparties. The rationality of setting an exposure limit for a group of connected counterparties is warranted by the assumptions
that once one of the counterparties failed, all of the other connected counterparties would highly likely to fail.
We are, however, skeptical whether the same rationality as above can be applied to the climate-related financial risks. Even though clients significantly
exposed to environmental risks may be susceptible to a common environmental risk driver, it does not necessarily mean that once one of the client
failed due to the environmental risk driver, the other clients would also highly likely to fail. The potential transmission channels of environmental risks
to the viability of the respective clients are not homogeneous. They are much more complex than the concept of “connected” or “economical

6

Question

Comment
dependency” assumed in LEX. We believe that the level of correlation between the viability of respective clients and a common environmental risk
driver will be, at least, much weaker than that of the connectedness or dependency assumed in LEX.
Therefore, we are of the view that setting a limit to the total amount of the exposures to carbon-intensive counterparties is not a legitimate approachin nature and that will not complement the Pillar 1 framework.
Although the level of concentration of the exposures to carbon-intensive counterparties or sectors can be a signal for a further analysis for supervisors,that purpose can be achieved by other supervisory tools, such as a scenario analysis, and will not warrant the introduction of new blanket monitoring
and reporting requirements.
In addition, corporate transitions are essential to achieving carbon neutrality. We believe that a concentration limit that uniformly limits environmental
risks by individual company, industry, or country in the process of transitioning to carbon neutrality may impair flexibility in terms of avoiding the riskof disincentivizing the transition and such an approach is not suitable.

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