Legal & Regulatory News

EBA report on incorporating ESG risk in investment firms' supervision

On 24 October 2022, the European Banking Authority (EBA) published a report (EBA/REP/2022/26) on incorporating environmental, social and governance (ESG) risks into the supervision of investment firms (the Report).

In the Report, the EBA suggests that there is a need for the integration of ESG factors and risks under all the main Supervisory Review and Evaluation Process elements, including: business model analysis; assessment of internal governance and risk management; and assessment of capital and liquidity risks.  However, the EBA also acknowledges the data and methodological challenges this currently poses. The Report, therefore, recommends that supervisory processes should follow a gradual approach, prioritising the recognition of ESG risks in investment firms' strategies and governance arrangements and then later incorporating ESG risks in the assessment of risks to capital and liquidity.

The Report sets out the EBA's expectation that with the development of new methodologies, and the reduction of current challenges, "competent authorities" should monitor and encourage investment firms' efforts to invest in the necessary infrastructure to increase coverage and ESG data collection.

The Report is intended to be considered in conjunction with the EBA's previous report on the management and supervision of ESG risks for credit institutions and investment firms, and the EBA's Guidelines on common procedures on the supervisory review and evaluation process under the Investment Firms Directive.

Click here to view the Report.