Shearman & Sterling LLP | FinReg | European Commission Publishes Study on Banks’ and Prudential Supervisors’ Integration of ESG Factors
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  • European Commission Publishes Study on Banks’ and Prudential Supervisors’ Integration of ESG Factors

    The European Commission has published a study on EU banks’ integration of environmental, social and governance factors into their risk management processes, business strategies and investment policies. The study finds that, although banks have made efforts to pursue ESG agendas, the speed and degree of integration of ESG considerations must accelerate. In addition, it finds that prudential supervisors could take more action to integrate ESG factors into their supervision of banks. Further details of the challenges facing banks and supervisors in ESG integration are set out in the study. 

    The study also describes principles of best practice for ESG integration, including:
    • Collaboration between banks and supervisors to develop coherent definitions of ESG risks that provide a common framework for understanding risks;
    • Development of publicly-stated ESG risk strategies and objectives by banks and supervisors, with supervisors providing guidance to banks on their strategies;
    • Enhancing the quality, availability and comparability of ESG-related data published by banks;
    • Increased stress-testing and scenario-analysis by banks to measure their exposure to ESG risks, with some stakeholders suggesting that supervisors should conduct mandatory climate stress tests for banks;
    • Potential for mandatory compliance with certain standards, such as the EU Green Bond Standard or the EU Taxonomy; and
    • Increased accountability for ESG integration at executive and board level.

    The Commission’s study forms part of the EU’s ongoing efforts to promote sustainability in the financial sector. In 2018, the European Commission launched its Action Plan on Sustainable Finance, which aims to connect finance with sustainability. There have been a range of legislative developments in connection with the Action Plan, including the Taxonomy Regulation, the EU Benchmarks Regulation and the Sustainable Finance Disclosure Regulation.

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