EBA - integration of ESG risks in the supervision of investment firms

On 24 October 2022, the European Banking Authority (EBA) published a report (the Report) setting out how environmental, social and governance (ESG) risks should be integrated into the supervision of investment firms.

Addressed to national competent authorities (NCAs), the Report was sent to the European Parliament, the Council of the EU and the European Commission.

Background

The Report was produced under the EBA’s mandate provided by Article 35(d) of the Investment Firms Directive and builds on the EBA’s 2021 report on the management and supervision of ESG risks. It follows publication of its Supervisory Review and Evaluation Process Guidelines and the European Commission’s work on sustainable finance (i.e., the various delegated legislations passed to integrate sustainability into UCITS Directive, AIFMD, MiFID II).

What does the Report conclude?

The Report comes to the following general conclusions;

• embedding ESG factors and risks in the scope of supervisory reviews should be done in a proportionate manner, taking into account the investment firm’s business model, size, internal organisation and the nature, scale and complexity of its services and activities as well as the materiality of its exposure to ESG risks;
• the granularity of assessment should align with the categorisation of investment firms as set out in the SERP Guidelines;
• the integration of ESG risks into the supervision of investment firms should be done gradually with short-term implementation focusing on the firms’ strategy, business model analysis and internal governance arrangements, turning later to the assessment of ESG risks to capital and liquidity;
• NCAs should monitor how investment firms identify, assess and manage their exposure to ESG risks and their efforts to put in place necessary internal infrastructure and processes to increase coverage and collection of ESG data.