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Background of our dedicated webinar
On March 2021 1st, the European Banking Authority (EBA) published its consultation on draft Implementing Technical Standards (ITS) for the inclusion of climate and other environmental, social and governance (ESG) risks in Pillar 3 disclosures. The objective is to specify uniform disclosures that convey comprehensive and comparable information to assess banks’ climate risk profiles. The consultation puts forward qualitative disclosures of ESG risks and templates with quantitative disclosures on climate change transition and physical risks, climate change mitigating measures. One prominent indicator is the Green Asset Ratio (GAR) on EU Taxonomy-aligned activities.
Considering the significance of the new draft disclosure requirements, MLAdvisory organized a virtual panel discussion with its clients on 18th of March 2021 to discuss the implementation operational challenges. Participants included representatives from 20 banks from 7 countries, regulators and supervisors and academia.
The panel was moderated by Charles Morel, MLAdvisory CEO & Partner. Panelists included:
- Christine Lafon(BNP PARIBAS, Head of ESG Risk Regulatory)
- Eduardo Avila(BBVA, Head of Global Supervisors Relations & EBA BSG Vice Chair)
- Pilar Gutierrez(EBA, Senior Policy Expert)
Each panelist provided us with a unique insight on how these challenges impact financial institutions, discussing the implementation road ahead as well as the actions that are already undertaken.
Overview of the EBA’s consultation paper
Based on lessons learnt from past transformation projects, participants highlighted the need for a fast mobilization of all internal stakeholders and clear project governance ownership. Many financial institutions will likely have to (re)define the involvement of Risk, Finance, Corporate & Social Responsibility (CSR) and of the business lines in climate risks and ESG topics. An adequate level of acculturation to climate risks and Pillar 3 ESG requirements, will be essential as well as full adherence of all internal stakeholders.
A dynamic project approach where Risk, Finance, CSR, as well as the Business Lines, Data, and IT work closely together and collaborate frequently through steering committees will be another key success factor throughout the implementation journey.
Financial institutions currently lack the granular climate risk and green asset data required by the EBA’s Pillar 3 ESG disclosures and heavily rely on external data providers. While data acquisition and assessment vary in maturity for transition risk and physical risk, panelists stated that the EBA’s requirements go well beyond the TCFD reports voluntarily published by large banks. Significant efforts lie ahead to ensure datasets are comprehensive and comparable for all the exposures in scope of the new disclosures.
Based on our experience with implementing Basel II, early action on data gaps, ranging from simulations using proxies to the design and deployment of adequate data and IT infrastructures are key to making progress and can help alleviate subsequent constraints. Lessons learnt from the implementation of the liquidity ratios and related data challenges are valuable for addressing the challenges arising from implementing the new climate risk and Green Asset Ratio disclosures.
Considering the higher level of scrutiny over Pillar 3 reports and current regulatory guidelines, ESG data infrastructure and IT architecture shall be based on BCBS 239 principles for risk data aggregation and risk monitoring.
Conclusions and next steps
Although the first draft Pillar 3 ESG Disclosures ITS has been released very recently by the EBA, banks already identified significant challenges, which would need to be addressed rapidly in order to ensure a smooth implementation. Building a strong governance process between CSR, Finance, Risk, IT and business functions has been identified as a key success factor for responding to these challenges. At MLAdvisory, we strongly believe that this first draft ITS provides common ground between several initiatives (NFRD, TCFD, EU Taxonomy, ECB questionnaire). This is a blueprint for banks to design their own indicators (internal and external), while progressively improving the ESG data quality in the internal systems.