February 3, 2021
European Banking Authority
Floor 24-27, Europlaza, 20 avenue André Prothin,
La Défense 4, 92400 Courbevoie, France

Japanese Bankers Association

JBA Comments on the EBA discussion paper: “Management and Supervision of
ESG risks for credit institutions and investment firms”
Dear Sirs/Madams:
The Japanese Bankers Association 1 (JBA) appreciates the opportunity to provide our comments on theEuropean Banking Authority’s (EBA) discussion paper: “Management and Supervision of ESG risks for credit
institutions and investment firms” (hereafter “the discussion paper”) on November 3, 2020. It is one of the mostprioritized topics not only within the EU but globally to incorporate ESG factors 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.

General Comments
The JBA member banks, as non-EU financial institutions, have operations in the EU. We assume the discussion
paper will impact the future discussions on a global scale and hope our comments will contribute to the policy
debate going forward.
In addition to the responses we have made to specific questions, we would like to provide some high-levelcomments as discussed below;
1. Discussions going forward
The EBA expresses its holistic views on ESG risks in the discussion paper, and we understand this is a goodstarting point for further discussions. Although we duly understand the importance of addressing social andgovernance risk, at this point in time, we recognize managing environmental risk to be one of our top priorities
from a global regulatory perspective.
According to the CRR2, it is our understanding that after this consultation, the EBA is tasked to finalize thereport by June 2021 and will consider how to incorporate ESG factors in Pillar 1 and Pillar 3 requirements. The
JBA requests the EBA to continue engaging with the industry periodically during their work to securetransparency and reflect any inputs made by the industry in finalizing the reports etc.
2. Scope of application or extension to third-country banks of supervision in EU
While the discussion paper is not designed to be legally binding, we need to understand the scope of applicationfrom a non-EU banks’ perspective for if and when banks are subject to taking any actions in the future. It should
be clarified whether our business operations on a global basis would be in scope of the possible regulatory
requirements deriving from the discussion paper. We believe the scope of application should be clarified in
1

The Japanese Bankers Association is the leading trade association for banks, bank holding companies and bankers associations inJapan. As of February 3, 2021, the JBA has 115 Full Members (banks), 3 Bank Holding Company Members (bank holding
companies), 73 Associate Members (banks & bank holding companies), 58 Special Members (regionally-based bankers associations)and one Sub-Associate Member for a total of 250 members. Several of its largest member banks are active participants in the EU
financial markets.

1future discussions and moreover the scope should be limited to entities established within the EU. The JBA
believes this consultation will enhance the ongoing discussions about the appropriate approach to banking
supervision between industries and regulators, as well as the coordination between regulators.
It is extremely important for EU policy makers to consider that if and when our home regulator (or other hostregulators in other major jurisdictions where we operate) decides to introduce an ESG related risk management
framework or set forth supervisory expectations and regulatory requirements in dealing with climate changerisk, Japanese banks would be required to comply with those as well. However, if these are different and/orinconsistent with those deriving from the discussion paper, the compliance exercise would unavoidably be
inefficient and possibly be ineffective to comply with multiple requirements. To avoid such inefficiencies andadditional inconsistency in requirements, we encourage the EU policy makers to incorporate the framework ofequivalency/deference with respect to the third country regulatory requirements, based on the communicationand dialogues with regulators in other jurisdictions.
To secure a global regulatory framework that works, the consistency with other existing and future international
regulatory frameworks, such as the Basel requirements, should be ensured. Further, we request the EU policy
makers to coordinate with other regulators, not only within the EU, but in other jurisdictions.
3. Importance of globally standardized definitions/Securing the flexibility
In the discussion paper, the focus is mainly to propose standards and definitions of ESG factors and risks thathave an impact on the bank’s balance sheets and to propose some guidance on how to integrate them into risk
management. The coverage extends beyond “transition risks” and “physical risks”, which are globally
recognized risks but to define “other risks” as well.
Standardized definitions are useful but need to be flexible enough to foster innovations and facilitate transition.
Limiting the flexibility of definitions would limit the future development of the risk management frameworkfor financial institutions. We believe taking into consideration banks business model and proportionality, aflexible approach should be allowed. To that point, each definition should be high-level and non-exhaustive.
Also, the EBA should consider the alignment with other international discussions being made at the Financial
Stability Board (FSB), the Task Force on Climate-related Financial Disclosures (TCFD), and the Network ofCentral Banks and Supervisors for Greening the Financial System (NGFS) etc.
4. Establishment of practical framework
In the discussion paper, the EBA sets out that the risk from the “counterparty” of banks, and associated risks
from dealing with the banks should be identified, assessed, and managed. It also indicates “the concept ofcounterparty may be understood as a client (e.g. an entity, individual) or as an issuer (e.g. sovereign, entity).”
We generally agree with this approach, although based on this definition of “counterparty”, banks will need toinclude the multiple types of stakeholders involved. For example, identifying quantitative and qualitative ESG
risk of inter-bank transactions or sovereign transactions is extremely difficult and any methodology will needfurther consideration.
Going forward, we request the EBA to continue discussions and engagement with various stakeholders not onlyin the EU but also globally in order to establish a more practical and usable framework.

Specific comments
Please refer to each answer/comment to questions in the designated answer format.
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February 3, 2021
[Specific Comments]
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Chapter4:Common definitions of ESG factors, ESG risks and their transmission channels
1Please provide details of other relevant frameworks  Some Japanese banks established “Environmental and social policy framework” mainly
for ESG factors you use.
for E and S factors, referring to the international discussions.

2

Please provide your views on the proposed  Limiting the flexibility of definitions would limit the future development of risk
definition of ESG factors and ESG risks.
management framework in each financial institution. Considering banks business modeland proportionality, flexible approach should be allowed. Common definitions are useful,but need to be flexible enough to foster innovations and facilitate transition.
 We generally support the efforts of the EBA to further develop environmental, social andgovernance risks as they materialize on bank balance sheets.
 With the aim of moving forward to a more sustainable economy not only at European
level, but also globally, there is a strong need for common definitions to help banks andother financial institutions integrate ESG related risks into their existing risk management
framework in a consistent manner, to avoid any fragmentation along jurisdictional lines.
 Our membership has been involved in the assessment and reporting of various ESG
factors across a broad range of financial products. Although the current use of definitionsof ESG will vary across the membership of the JBA, we would strongly encourage the
EBA to align the proposed definitions with commonly referred frameworks, such as the
GRI Standard, UN Global Compact, ISO 26000, Guidance on social responsibility,
SASB (Sustainability Accounting Standards Board), Environmental Reporting
Guidelines (2018) and the recommendations of the TCFD.

3

Do you agree that, for the purpose of assessing their  We agree with EBA approach to prioritize ESG risks, as it is essential to strengthen
inclusion in institutions’ and supervisors’ practices
relationship with various stakeholders such as customers or investors, as well as tofrom a prudential perspective, ESG risks should berecognize relevant risks appropriately. Appropriate recognition is mandatory to make the1Question

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approached primarily from the angle of the negative
right decision for lending. In addition, we believe that attention should be paid to business
impacts of ESG factors on institutions’opportunities, including customer transitions, etc..
counterparties? Please explain why.
 ESG risk analysis initiatives are not yet mature in the market and there are cases with nocorrelation between the indicators. Consideration of hasty incorporation into prudential
regulation (Risk Weighted Capital Requirements, etc.) before completion of theseempirical analyses should be carefully considered, as it may create unintended distortionsin economic activities and accumulate risks in the financial system.
 There is currently no global consensus on the impact of climate change risks. We believethat the first step should be to establish international consensus on the impact of futureclimate change risks through thorough quantitative analysis, and then to consider what
measures are necessary to mitigate such impacts from the perspective of prudential
regulations.
4

Please provide your views on the proposed  Physical risks are defined as acute and chronic risks. However, acute risks include many
definitions of transition risks and physical risks
natural disasters, and chronic risks are affected by future projected changes inincluded in section 4.3.
temperature.
 For acute risks, there is a lack of public data on many disasters.
 Chronic risks are also difficult to calculate without detailed sector assumptions. In
addition, emphasis on bottom-up methods creates hurdles because of the need to obtain
individual company data.
 The concept of chronic risk and transition risk may overlap to some extent, and will need
to be sorted out in the future.
 As described in Section 55, it is desirable to establish a certain degree of common risk
measurement method for each risk driver and each sector, since there is no common
method for risk transfer, information gathering from a wide range of data sources isnecessary, and risk categories are defined a little different for NGFS and TCFD.
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 It is also necessary to sort out the interaction between transition risk and physical risk in
the future. However, since the prerequisites and technical knowledge and parameters
required for transition risk and physical risk are completely different, it is necessary todevise ways to set up scenarios that are consistent between the two.

5

Please provide you views on the proposed definition  We would like to request more detailed definition especially for S and G. As long as weof social risks and governance risks. As anunderstand, social risk can be defined as the risk of “not be compliant with the relevant
institution, to which extent is the on-going COVIDrules and regulations”, governance risk can be understood as the governance framework
19 crisis having an impact on your approach to ESG
we have implemented so far. We are afraid there are not any factors that are specific tofactors and ESG risks?
climate-change banks should consider.

6

Do you agree with the description of liability  We would like to seek more detailed explanations including some examples of the cases
transmission channels/liability risks, including thewhere liability risks would be revealed.
consideration that liability risks may also arise fromsocial and governance factors? If not, please explainwhy.

7

Do the specificities of investment firms compared to NA
credit institutions justify the elaboration of different
definitions, or are the proposed definitions included
in chapter 4 also applicable to them (in particular theperspective of counterparties)? Please elaborate on
the potential specificities of investment firms in
relation to ESG risks and on how these specificities,
if any, could be reflected in this paper.

Chapter5: Quantitative and qualitative indicators, metrics and methods to assess ESG risks
8

Please provide your views on the relevance and use  The EBA should adopt a phase-in approach.
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Answersof qualitative and quantitative indicators related to  Banks are currently in the process of assessing the impact of environmental/climate risks,
the identification of ESG risks.
which can impact in the medium and long term solvability of their clients. Such risks
could be assessed with external data and few variables that can be used to build models
and stress tests. Since other “ESG” risks are much more difficult to quantify, a qualitative
approach is a first stage to progressively include those risks in our framework. A phasein approach is necessary to organize the internal processes, systems, organization andretrieve appropriate data.
 Regarding the use of historical data, please ensure that the quantitative calculation
method used by the parent company outside EU can be allowed to apply mutatis mutandis
to the EU subsidiaries of foreign banks.
9

As an institution, do you use or plan to use some of  We understand Japanese banks do not use nor plan to use any of the ESG indicators
the ESG indicators (including taxonomies,
described in section 5.1 at the moment. However, one of our member banks upholds
standards, labels and benchmarks) described in
TCFD and has been calculating and disclosing carbon-related assets in accordance withsection 5.1 or any other indicators, inter alia for the
the TCFD recommendations since FY2019. With respect to calculation of carbon-related
purpose of risks management? If yes, please explain
assets, the bank adopts the sector approach, in which the utility sector and the energy
which ones.
sector are specified as the scope and exposures that do not correspond to carbon-related
assets (water project, renewable energy, etc.) are excluded from the utility and the energy
sector. Incidentally, the bank is currently still under discussion how to utilize and develop
the calculated figures.

10 As an institution, do you use or plan to use a NA
portfolio alignment method in your approach tomeasuring and managing ESG risks? Please explain
why and provide details on the methodology used.
11 As an institution, do you use or plan to use a risk  As an individual institution, scenario analysis has been conducted and we are planning
framework method (including climate stress testing
to take deep study about necessary information to conduct scenario analysis following
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and climate sensitivity analysis) in your approach tomeasuring and managing ESG risks? Please explain
why and provide details on the methodology used.

NGFS scenario, such as data and schedule, coordinating with Japanese Financial Services
Agency (JFSA). We have yet to conduct stress testing as we are currently still underconsideration.

12 As an institution, do you use or plan to use an  Currently we have yet to use.
exposure method in your approach to measuring andmanaging ESG risks? Please explain why andprovide details on the methodology used.
13 As an institution, do you use or plan to use any  Currently we have no plan to use.
different approaches in relation to ESG risk
management than the ones included in chapter 5? If
yes, please provide details.
14 Specifically for investment firms, do you apply other NA
methodological approaches, or are the approaches
described in this chapter applicable also forinvestment firms?
Chapter6: The management of ESG risks by institutions
15 Please provide your views on the extent to which  Smaller institutions could be damaged more severely than large institutions/G-SIBs whensmaller institutions can be vulnerable to ESG risks
ESG risks are revealed since their capital/liquidity capability to absorb those risks isand on the criteria that should be used to design andlimited. To some extent, smaller institutions should prepare for managing ESG risks.
implement a proportionate ESG risks management
Proportionate approach should be implemented, based on the discussion with their home
approach.
regulators.
16 Through which measures could the adoption of NA
strategic ESG risk-related objectives and/or limits befurther supported?
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17 Please provide your views on the proposed ways NA
how to integrate ESG risks into the businessstrategies and processes of institutions.
18 Please provide your views on the proposed ways  Senior management governance framework, such as Risk Committee and Executive
how to integrate ESG risks into the internalCommittee, should be used. In addition, using disclosure framework such as integrated
governance of institutions.
report or quarterly report is also essential.
19 Please provide your views on the proposed ways  We are recognizing ESG risk as one of our top risks and have started to consider
how to integrate ESG risks into the risk management
integrating ESG risks into risk appetite framework in the medium to long term. However,framework of institutions.
we still have challenges in data availability and lack of evidence to integrate ESG
perspective in assessment of creditworthiness or repayment ability of clients. Therefore,
we believe that integrating ESG risks into the risk management framework requires acareful consideration at this stage.
 In addition, with regards to recovery plans referred in page 113, it should be considered
carefully to integrate elements of ESG risk (especially transition risk) management into
recovery plans. There is the large gap in the concept of time frame between current
recovery plans and the recommendation in the discussion paper. Current recovery plans
require consideration of short-term recovery measures to recover from the current
possible crisis (which requires recovery within one to several years at most). However,
the analysis and management of ESG risks such as climate change risk requiresconsideration of a long-time horizon of several decades. Therefore, it is essential to makeappropriate adjustments in the handling of this gap in order to integrate elements of ESG
risk (especially transition risk) management into recovery plans properly.
20 The EBA acknowledges that institutions’  We acknowledge S and G risks are important. However, since the impact of climateapproaches to environmental, and particularly
related risks to banks’ balance sheet is significant and interest of global regulators is
climate-related, risks might be more advanced
increasing, we are dealing with environmental risks, especially on climate-related risks,
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compared to social and governance risks, and gives
in terms of risk management. We are planning to deal with S and G risks in the future,
particular prominence in this report to the former
based on the importance of these risks.
type of risks. To what extent do you support this  Considering its emergency, we suggest prioritizing environmental risks, especially on
approach? Please also provide your views on any
climate-related risks. With regards to S and G risks, as we respond to the previous
specificities associated with the management ofquestion, there are no consistent definitions of those risks yet, as well as methodologies
social and governance risks.
to identify, assess and manage them. The impact from those two risks to banks’ balance
sheet is not ignorable, and we need to approach them in the future, but detailed study andglobal stock takings are indispensable.
21 Specifically for investment firms, what are the most NA
relevant characteristics or particularities of businessstrategies, internal governance and risk managementthat should be taken into account for the
management of the ESG risks? Please provide
specific suggestions how could these be reflected.
Chapter7: ESG factors and ESG risks in supervision
22 Please provide your views on the incorporation of  Strengthening supervision of climate and environmental risk management should be
ESG factors and ESG risks considerations in thecoordinated with changes in the social structure or the development of appropriate riskbusiness model analysis of credit institutions.
reduction measures for such risks.
 In addition, if only strengthening risk management is to be pursued first, it is desirable toconsider sharing the burden of such risk management between the financial institution orits customers.
 While it is possible to consider how climate change and environmental risks should be
defined and managed, it is difficult to expect the automatic-risk-blocking effectimmediately after the risk appetite and the risk limit are applied and the relevant risks aretaken into consideration.
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 The expected effects should be carefully verified and judged, and it should be recognized
and understood that decisions on a case-by-case basis will be necessary, and thatflexibility should be allowed.
 Any guidance from the international standard setting bodies needs to be principle based
to cater for local specificities.
 Given the mutual dependency between borrowers and lenders (i.e. banks can only be“green” when borrowers become “green”), banks have the responsibility to facilitate thetransition to “greener” activities through engagement, and any standards need to support
such facilitation.

23 Do you agree with the need to extend the time  We agree that risk management horizons should be prolonged compared with the current
horizon of the supervisory assessment of thestress testing or supervisory analysis. However, the longer the time horizon will be, thebusiness model and introduce as a new area ofless accurate the result of stress tests or assessment will be, because its uncertainty will
analysis the assessment of the long term resilience
increase. Banks and regulators should thoroughly discuss time horizon in advance toof credit institutions in accordance with relevant
reach a consensus. Our final goal may be 2050, but considering 30 year horizon at one
public policies? Please explain why.
jump is not realistic, rather, we should set practical and predictive time horizon with themind of 2050 target year when banks establish ESG risk management framework.
 We acknowledge that the current 3-4 years risk management horizons will need to be
expanded in order to facilitate the longer-term perspective needed to assess ESG risks.
Currently banks have discussed a 10 years horizon, which is compatible with theweighted average life of bank assets.
24 Please provide your views on the incorporation of NA
ESG risks considerations into the assessment of thecredit institution’s internal governance and wide
controls.
25 Please provide your views on the incorporation of  We are under discussion.
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ESG risks considerations in the assessment of risks
to capital, liquidity and funding.
26 If not covered in your previous answers, please  Please clearly state that the supervisory policy and approach of the home country
provide your views on whether the principle ofauthorities of foreign banks with headquarters outside EU should be fully considered inproportionality is appropriately reflected in thethe application of this guide to the EU subsidiaries of foreign banks.
discussion paper, and your suggestions in this  It is preferable that proportionality will be secured, but it is better to provide more specificrespect keeping in mind the need to ensure
information on what kind of simplification is possible.
consistency with a risk-based approach.
27 Are there other important channels (i.e. other than NA
the ones included in chapter 7) through which ESG
risks should be incorporated in the supervisory
review of credit institutions?
Annex128 As an institution, do you use or plan to use some of NA
the indicators and metrics included in Annex 1? If
yes, please describe how they are used in relation to
your ESG risk management approach.
29 If relevant, please elaborate on potential obstacles, NA
including scope of applicability, granularity and data
availability, associated with the indicators andmetrics included in Annex 1.
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