ESG risks – European and international new framework

Environmental, Social and Governance (ESG) risks for credit institutions are increasingly becoming a concern for international and European regulators and supervisors. In this context, several regulatory initiatives, which affect leasing companies, are taking place both at international and European level.

Europe – European Banking Authority (EBA)

In Europe, the EBA has developed a roadmap on sustainable finance and as part of the planned EBA actions in accordance with its roadmap on the implementation of the EU banking package is producing a number of technical standards and guidelines.

The latest initiative produced by the EBA is a consultation on its draft Guidelines on the management of ESG risks. The draft Guidelines set out requirements for institutions for the identification, measurement, management and monitoring of ESG risks, including through plans aimed at addressing the risks arising from the transition towards an EU climate-neutral economy.

The Guidelines set requirements for the internal processes and ESG risks management arrangements that institutions should have in place. As part of it, these Guidelines set out principles for the development and content of institutions’ plans in accordance with the Capital Requirement Directive (CRD VI), with a view to monitoring and adequately addressing the financial risks stemming from ESG factors, including those arising from the adjustment process towards the objective of achieving climate neutrality in the EU by 2050.

Leaseurope has pointed out to the EBA the importance of leasing for the financing of the green transition and the role of the leased asset to mitigate environmental risks. It has also emphasised the instrumental role of leasing in the green transition, the strong risk management techniques applied by our industry to manage asset risks including climate related risks, and the importance of not adding additional reporting burden to SMEs that are seeking financing through leasing.

International – Basel Committee

At international level, the Basel Committee on Banking Supervision (BCBS) is developing a holistic approach to address climate-related financial risks for the global banking system.

As part of this work the BCBS is engaging with the concerned stakeholders to seek their views on their proposed Pillar III disclosure framework for climate-related financial risks.

The BCBS is analysing how a Pillar III disclosure framework for climate-related financial risks would further its mandate to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability, and the potential design of such a framework. The BCBS proposes a qualitative and quantitative Pillar III disclosure requirements that would complement the work of other standard setters, including the International Sustainability Standards Board (ISSB), and provide a common disclosure baseline for internationally active banks.

The BCBS recognises that the accuracy, consistency and quality of climate-related data is still evolving, but at the same time, disclosure requirements will accelerate the availability of such information and facilitate forward-looking risk assessments by banks. For this reason, the Committee aims to incorporate a reasonable level of flexibility into a future framework. Based on the feedback received, the BCBS will consider which elements would be mandatory and which subject to national discretion. More generally, the Committee is of the view that the development of a meaningful and robust Pillar III framework for climate-related financial risks is likely to be an iterative process.

Leaseurope is engaging with the BCBS to ensure that the international regulatory framework in the area of climate related risks takes into account the specificities of the leasing industry so that it can continue playing a key role in the transition towards a more sustainable global economy.

We continue actively monitoring the work of international and European regulators on ESG risks and engaging with them to ensure the specialised leasing business is recognised in the development of this important regulatory framework.