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Banks Must Consider ESG Risks as Part of Annual Supervisory Review
In a move aimed at strengthening financial stability, European banks will soon be required to incorporate environmental, social, and governance (ESG) considerations into their annual supervisory review process. The new requirements, which are set to take effect from January 2025, follow a series of recent developments designed to promote sustainable finance practices in the banking sector.
Reporting ESG Risks
Under the new rules, all EU banks will be required to report on ESG risks and disclose related information as part of their annual supervisory examination review process (SREP). The European Banking Authority (EBA) is currently preparing a one-off “Fit-for-55” climate risk scenario analysis of EU banks, assessing the resilience of the financial sector in the context of the Fit-for-55 package.
Promoting Sustainable Finance Practices
The EBA’s initiative follows the introduction of new reporting requirements under the Corporate Sustainability Reporting Directive (CSRD), which came into force in January 2023. The CSRD obliges companies, including banks, to disclose information on the societal and environmental impact of their operations and value chain.
Favourable Risk Weight Treatment for Green Infrastructure Projects
Banks will also benefit from a favourable risk weight treatment if they finance infrastructure projects with a positive or neutral environmental impact assessment attached to them. The new rules aim to incentivize banks to invest in sustainable infrastructure projects that support economic growth while minimizing environmental harm.
Diversity and Inclusion Initiatives
In other news, the Central Bank of Ireland (CBI) has made significant progress in promoting diversity and inclusion within the banking sector. A recent report revealed a 10% increase in female applicants for senior positions in regulated firms, with 32% of applications now coming from women. The CBI is also working to promote gender diversity through its Woman in Finance Charter initiative.
New Mortgage Rules and Credit Union Services
The CBI has introduced new mortgage rules aimed at protecting consumers in a changing economic landscape. The revised Consumer Protection Code, which is set to take effect in 2024, includes provisions designed to enhance information provision and options for borrowers eligible to switch mortgage products or providers.
Meanwhile, the President of Ireland signed into law the Credit Union (Amendment) Act 2023, expanding credit union services in the country. The development is seen as a positive step towards promoting financial inclusion and supporting non-traditional credit institutions.
Client Asset Requirements and Governance
The CBI has introduced new client asset requirements for banks carrying out MiFID investment business. The regulations, which came into force on January 1, 2024, include provisions relating to:
- Reconciliation and calculation
- Transfer of business
- Reporting requirements
- Client disclosures
- Development of a client asset management plan
In addition, the CBI’s fitness and probity regime has been strengthened through the introduction of new rules aimed at ensuring the competence and integrity of individuals carrying out key and customer-facing positions in banks. The regime includes three pillars:
- Ongoing obligations for regulated firms
- Pre-approval by the CBI for PCF functions
- Investigative and enforcement powers
The European Central Bank (ECB) is responsible for fitness and probity assessments of management boards and “Key Function Holders” in Systemically Important Institutions (SIs).