The next steps towards a green bank – Managing ESG risks in the banking sector


Many banks have responded very publicly to increased consumer pressure to integrate environmental, social and governance (ESG) factors into their decision-making and product lines. However, the management and assessment of internal ESG balance sheet risks of banks are much less developed. This area is the subject of regulatory attention and the sector will see significant changes in the ESG risk management practices of banks in the years to come.

ESG accounting and disclosure Pillar 3

The European Commission recently proposed the Directive on Corporate Sustainability Reporting (CSRD). This will strengthen ESG accounting disclosure requirements for banks. Banks must also make more complete ESG disclosures in their Pillar 3 regulatory declarations from June 2022. These disclosure obligations will apply to all large credit institutions whose securities are traded on a regulated market of any kind. which EU Member State, although their precise content is not yet final.

The European Banking Authority (EBA) has been tasked with producing a report describing the content of this ESG information and issuing related guidance. The resulting EBA report on ESG risk management and oversight was published in June 2021. It goes beyond examining the format of banks’ ESG reporting under pillar 3 (pillar ” publication ”) and assesses the coverage of ESG risks in pillar 2 (“ prudential supervision ”).

ESG regulatory approach under Pillar 2

The EBA report provides definitions of ESG risks and details the measures taken by credit institutions to identify, assess and manage them. It also provides guidance on how ESG risks should be included in the supervisory review and assessment process (SREP) by competent authorities. This EBA report will be the cornerstone of EU banking supervision policy in the future. The EBA will base future guidelines on ESG risk management for institutions and updates of SREP guidelines for supervisors on its content. The CBI takes an approach that respects the EBA guidelines, so we can expect them to be binding on Irish banks.

Significant Institutions (SIs) headquartered in Ireland are already subject to the regulatory expectations set by the ECB in its 2020 guide to climate and environmental risks. The ECB also recommended that national supervisors apply the 2020 Guide in their supervision of less significant institutions (LMIs) in a proportionate manner. We can expect the CBI to adopt this recommendation with enthusiasm, as it has already identified climate change as a key objective. Announcing its participation in the green bond investment fund established by the Bank for International Settlements in May 2021, he noted that regulated entities can expect it to become increasingly intrusive in overseeing risks. related to climate change in the future.

But what will the regulators expect?

Blackrock published a study in August 2021 for the European Commission that explored the integration of ESG factors into banks’ risk management processes and prudential supervision. Overall, the study found that integrating ESG factors into the practices of banks and supervisors is still in its early stages and identified several obstacles to further progress.

Does “double materiality” have a regulatory meaning?

The Blackrock study found that most banks assess ESG risks both in terms of financial materiality and the significant impact of activities on environmental and social factors. This is called “double materiality” and it is a central concept of CSRD. However, the study also found that many banks have inconsistent definitions of ESG risk. It also revealed that few of them had developed detailed listings with mappings by industry, geography, and customer segment to understand their relevance. Climate-related risks are often associated with financial types of risks, while other types of risks are generally associated with reputational or strategic risks. Banks do not know whether traditional types of risk can ever fully understand risks from the point of view of environmental and social materiality. This seems to call into question the whole concept of “double materiality” as the basis of a scientific approach to risk management.

The Blackrock study revealed considerable debate among supervisors about “double materiality”. Most supervisors recognized the importance of considering the environmental and social impact of banking activities, but some argued that the focus of prudential supervision should remain on financial materiality. Opinions also differ among regulators on whether ESG risk should be seen as a primary risk itself or as a driver of other types of risk. It seems difficult, given this lack of consensus on fundamental approaches, to find comprehensive short-term strategies to fully integrate ESG risk into the prudential supervision framework.

Is there a place for ESG risks in Pillar 1?

Many supervisors do not consider the Pillar 1 tools suitable for ESG risk management. The main reason is that strong quantitative evidence of a risk differential, for example for green assets versus brown assets, has yet to be established. Conversely, NGOs argue that capital requirements should play a role in inducing banks to redirect capital towards sustainable sectors and investments. Supervisors fear that this is policy-based and may have unintended consequences.

The quantitative indicators for measuring ESG risks have not yet been defined by most supervisors. At this stage, the prudential assessment of ESG risks remains focused on the qualitative elements typically used to assess processes within a bank, such as examining the business model, governance and strategy.


Irish banks can expect to see greater prudential engagement under Pillar 2 with the qualitative elements of their short-term ESG risk management processes, alongside the new mandatory Pillar 3 disclosure requirements. clear how the global regulatory framework will ultimately capture the ESG risk assessment under Pillar 1. We believe that the CBI is likely to await the outcome of the ongoing work at global and European level in this area, rather than seeking to ‘do rider alone. ”By applying Pillar 2 national capital supplements for ESG risk. However, the CBI is likely to be an enthusiastic and early follower of Pillar 2 of the impending EBA and current ECB guidance on qualitative management of banks’ ESG risks. Therefore, we recommend that Irish banks consider urgently reviewing their governance and ESG risk management arrangements to meet the likely expectations of the CBI in this area.

Leave A Reply

Your email address will not be published.