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Workshop Summary: Joint EBA & EBF on Sustainable Finance (4 April 2019)

Core Content

The Joint EBA & EBF Workshop on Sustainable Finance, held on 4 April 2019 in Brussels, focused on the integration of sustainability considerations into the financial frameworks and risk management practices of EU banks and financial supervisors. The event aimed to foster a structured dialogue among stakeholders to address challenges and explore opportunities in sustainable finance, with an emphasis on climate-related risks, ESG integration, and disclosure practices.

Main Points and Key Discussions

1. Introduction and Purpose

• The workshop was organized by the European Banking Authority (EBA) and the European Banking Federation (EBF).
• It was attended by 120 representatives from credit institutions and financial supervisors.
• The goal was to shed light on current practices and thinking regarding the integration of sustainability into banking frameworks and risk management.

2. Climate-Related Risks as Financial Risks

• Banks and supervisors are increasingly recognizing climate-related risks as financial risks, not just reputational ones.
• A shift is needed from traditional approaches to integrate climate risk into financial risk management frameworks.
• ESG aspects are being incorporated into investment decisions, advisory activities, and risk assessments.

3. Challenges in ESG Integration

• Differences in tools and approaches exist across institutions.
• Common challenges include:
  • Establishing metrics for transition risk.
  • Lack of a common language around ESG, green, and sustainability risks.
  • Data availability and qualitative vs. quantitative disclosure issues.

4. NGFS Initiative and Climate Risk Integration

• The Network for Greening the Financial System (NGFS) is promoting climate risk as a financial risk within the mandate of central banks and supervisors.
• The first progress report emphasized the need for common understanding and definitions to support work on climate risk.
• A comprehensive report was expected to be released in April, with recommendations for integrating climate-related risks into supervisory practices.
• Scenario analysis and transition scenarios are being developed to support risk assessment.

5. Disclosures and ESG Information

• The TCFD recommendations and EU non-binding guidelines are influencing how banks disclose ESG-related information.
• Common issues include:
  • Scope 3 emissions measurement.
  • Transition from qualitative to quantitative disclosures.
  • Integrated reporting and availability of counterparties' data.
• The EU approach was considered appropriate, as it covers both the impact of climate risks on banks and the banks' impact on the environment.

6. Assessment and Monitoring of Climate Risks

• Scenario analysis and stress-testing are key tools for understanding physical and transitional climate risks.
• DNB presented a study on an energy transition risk stress test for the Dutch financial system, highlighting the potential financial stability impact of a disruptive energy transition.
• The public sector is encouraged to provide common parameters and definitions to support scenario analysis and stress testing.

7. Market Opportunities and Green Finance Instruments

• Banks are offering various green financial instruments such as green loans, green bonds, green mortgages, and green securitization.
• Despite market activity, challenges remain, including:
  • Competitiveness of green products.
  • Identification of eligible projects.
• The public sector is seen as crucial in providing incentives such as prudential support, taxation, subsidies, and guarantee funds.

8. Innovation and Digitalization

• Innovation and digitalization are highlighted as important for mainstreaming sustainable finance.
• Potential tools include blockchain, collaboration with Fintech, and new technologies for developing sustainable retail products.

Key Recommendations and Next Steps

• The public sector should:
  • Develop common metrics for ESG risk management and disclosure.
  • Explore more formalized reporting and disclosure requirements.
  • Set expectations for the incorporation of ESG factors into internal capital allocation.
  • Facilitate scenario analysis and stress testing through common scenarios and assumptions.
• The EBF emphasized active engagement with EBA, EU legislators, and the Technical Expert Group.
• Publications such as a report on incentives and guidelines for applying the EU taxonomy to lending portfolios are planned.

Conclusion

The workshop underscored the urgent need to integrate sustainability into banking practices and the importance of collaboration between banks, regulators, and the public sector. It also highlighted the need for innovation, data standardization, and a global approach to effectively manage and disclose ESG and climate-related risks.