EU trade bodies call on the ECB to delay new banking guidelines for climate risk

The International Swaps and Derivatives Association (ISDA) and the Association for Financial Markets in Europe (AFME), the derivatives and EU finance sector trade bodies, have urged the European Central Bank (ECB) to delay the introduction of proposed new supervisory expectations on how banks manage climate-related risks, to 2022.

Under the proposals, EU banks will be expected to annually assess and report any institutional exposure to climate-related risks, and “to exercise effective oversight” where such risks are identified from next year onwards. The ECB has specifically asked banks to consider lending portfolios, loan pricing, capital buffers, risk management frameworks and remuneration policies in their assessments.

Banks that conclude that their exposure to climate risks are financially “immaterial” will be expected to provide supporting “qualitative and quantitative information”, said the ECB.

AFME and ISDA argued that lenders should not be asked to reflect climate and environmental factors in the pricing of their loans “as long as the client’s environmental and climate-related performance cannot be quantified by a credit rating”

In a joint submission to the bank, ISDA and AFME have pushed back against the proposal’s timeline, citing ongoing research by the European Banking Authority  ̶ the supervisory body which sets EU banking rules  ̶  to establish whether exposure to assets with green or social objectives carries less financial risk. The study’s final report, due only in June 2025, could usher in looser capital requirements for ‘sustainable’ assets, or alternatively, tighter capital requirements for exposure to fossil fuels or other carbon-intensive activities.

The trade groups said that insufficient corporate sustainability data made it difficult for lenders to comply with the new disclosure and assessment requirements, and would result in a reliance on external data providers. The ongoing review of the Non Financial Reporting Directive, which will determine the scope of statutory sustainability disclosure by corporates, should also be finalised before the introduction of any new expectations, said the bodies. 

“Indeed, the ECB should recognise the current level of data quality – until this can be improved we urge expectations to be realistic,” they cautioned.

The ECB has publicly described its new proposals as compatible with “the current prudential framework”.

In addition, AFME and ISDA argued that lenders should not be asked to reflect climate and environmental factors in the pricing of their loans “as long as the client’s environmental and climate-related performance cannot be quantified by a credit rating”. Being required to do so would “distort the level playing field” for EU banks, they said.

The bodies urged the EU to treat the results of scenario analysis carried out by banks with “caution” and to not impose any “formal expectations” based on such findings. Despite exploratory work by green central banking group the NGFS and a number leading supervisors, there is still “no agreed methodology” for scenario analysis, which involves testing the resilience of an organisation across a number of hypothetical climate scenarios, the bodies said.

While the ECB’s proposals are not legally binding, large regulated lenders in the EU will be asked to account for any divergences from the revised supervisory expectations as part of their routine annual supervisory ‘dialogue’ with the ECB, while smaller banks will do the same with their respective national supervisors.

Separately, the European Commission has indicated that it will delay the introduction of long-awaited disclosure rules aimed at preventing greenwash after industry groups criticised the initial March 2021 deadline as “unrealistic” and voiced concerns over the lack of data points needed to underpin the disclosures. While the regulations will enter into force in March next year as planned, financial sector participants will reportedly be given more time to meet the new requirements.

RI previously reported on the critical market feedback to the EC’s proposals here; an op-ed responding to RI’s coverage and defending the proposals from campaign group ShareAction can be found here.