Our feedback on the European Banking Authority’s consultation on ESG risks management

On April 17, the Forests & Finance coalition provided feedback to the European Banking Authority’s public consultation on the Guidelines on ESG management risks.  The Guidelines set requirements for the internal processes and ESG risk management arrangements that institutions (banks) should have in place. They address the mandate specified in letters a, b and c of Article 87(a)5 of the CRD. The EBA launched a public consultation on January 18, 2024, and the final version of the guidelines is expected by the end of 2024.

F&F provided the next key recommendations:

• Adopt a principle of double materiality instead of just financial materiality: The EBA’s guidelines ignore that EU directives (CSRD and CSDDD) are based on the principle of double materiality. The EBA has adopted a principle of financial risk materiality by emphasising the adverse effects of ESG issues on all categories of financial risk to which financial institutions are exposed. The EBA does not mention that institutions are, in turn, responsible for the creation of ESG issues by, for example, financing business and economic activities that damage the environment or violate human rights. The guidelines should adopt the double materiality principle outlined in EU directives (CSRD and the CSDDD). Even if banks are temporarily exempt from specific obligations under CSDDD, the principle of double materiality remains intact. The CSDDD mandates financial institutions to establish transition plans to address climate change in line with this principle.
• Include the Global Biodiversity Framework and its five key principles and targets in the list of international standards to be considered by institutions when drawing their strategies and prudential plans.  In particular, target 14: integrate biodiversity in decision-making at every level; target 15: businesses assess, disclose and reduce biodiversity-related risks and negative impacts; and target 19: mobilise US 200 billion per year for biodiversity from all sources, including US$ 30 billion through international finance.
• Include minimum criteria for assessing ESG issues related to deforestation. We have provided specific examples of due diligence criteria for deforestation and biodiversity across the three E, S, and G aspects, as well as a list of references to international standards and good practices derived from the Forests & Finance methodology.
• Beyond developing internal capabilities, consistency in plans, strategies, and remuneration: remuneration and rewarding policies for employees across all management and operational levels should be consistent with adopting new ESG strategies.

We provided additional feedback, and in total, F&F reacted to 13 out of 26 questions formulated in the EBA’s public consultation. We reacted only to questions that fell within our scope of knowledge. See the complete feedback here.

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