On 24 October 2022, the European Banking Authority ("EBA") published its report on the integration of ESG risks in the supervision of investment firms ("report").
The Report, which is addressed to supervisory authorities, should be read together with the earlier Report on management and supervision of ESG risks for credit institutions and investment firms, which the EBA published back in June 2021 and which the Report builds upon.
I. Aim of the Report
The EBA notes the need to embed ESG considerations into the scope of the Supervisory Review and Evaluation Process ("SREP"), where ESG factors and risks could affect the risk profile of investment firms by acting as drivers of existing financial risk categories and impacting firms' balance sheets and income statements.
The Report therefore aims at integrating ESG risks and factors into the main elements of the SREP, including:
- Business model analysis;
- Assessment of internal governance and risk management;
- Assessment of risks (e. risk to capital and liquidity).
II. Regulatory approach
The Report specifies that the integration of ESG risks and factors into the SREP should be carried out proportionately and consider not only the firm's business model, size, internal organisation as well as the nature, scale and complexity of its services and activities, but also the materiality of the firm's exposure to ESG risks.
Such integration is to be implemented gradually, focusing in a first stage on strategy, governance and general exposure to ESG risks, before providing a more comprehensive coverage of risk to capital and liquidity.
Stay ahead of the ESG game, and contact our experts in case of any need for assistance!
- Read the Report here_
- Access the EBA report on management and supervision of ESG risks for credit institutions and investment firms here_
- Read EBA Guidelines on common procedures and methodologies for the supervisory review and evaluation process ("SREP") under the Investment Firm Directive here_
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.