Legal & Regulatory News

​European Banking Authority publishes discussion paper on the role of environmental risks in the prudential framework

On 2 May 2022, the European Banking Authority (EBA) published a discussion paper covering the role of environmental risks in the prudential framework.

The discussion paper evaluates the appropriateness of the current prudential framework in addressing environmental risk drivers, and considers the potential justification for a dedicated prudential treatment of exposures associated with environment and/or social objectives, and those subject to environment and/or social impacts. It sets out the EBA's central view that prudential regulation should remain risk-based and evidence-based in order to ensure that prudential requirements continue to reflect underlying risks and ultimately support institutions’ resilience to such risks. The EBA recommends that targeted amendments, enhancements or clarifications within the prudential framework could be used to address environmental risks more accurately than dedicated treatments such as supporting or penalising factors, given the various challenges associated with the design and implementation of such factors.

One key issue identified by the EBA in incorporating environmental risks into the prudential framework is that the prudential framework has historically been built on backward-looking risk assessments and so does not align well with the forward-looking nature of environmental risks. The EBA therefore calls for more data collection in relation to environmental risks and ensuring that institutions’ risk management tools and practices explicitly consider environmental risks. Acknowledging the sound scientific evidence of the potential for climate change and environmental risks to impact on the economy, the EBA does, however, leave the door open for the introduction of future forward-looking methodologies in relation to the environmental risks and seeks views from stakeholders on possible future amendments.

The EBA invites feedback from stakeholders on the discussion paper by 2 August 2022, and the EBA will use this feedback to finalise its report on this topic.

Click here to access the discussion paper.