(Bloomberg) — European bank regulators are preparing a set of ESG rules that focus squarely on capital adequacy, amid persistent evidence that the industry is failing to address growing risks from climate change.
The European Banking Authority is consulting on new minimum standards for addressing environmental, social and governance risks that include a new capital-based transition plan requirement, according to a consultation paper published this week. The EBA said the guidelines shouldn’t be interpreted as instructions to divest polluting assets.
“The goal of prudential plans is not to force institutions to exit or divest from carbon intensive sectors,” it said in the Jan. 18 publication. The goal is to get banks to “prepare or adapt,” including working with clients.
For now, ESG risk management at most banks “is still at early stages,” the EBA said. “Despite action taken in recent years, several shortcomings have been observed” that threaten the “soundness of institutions as the EU transitions toward a more sustainable economy.”
The demand comes on top of transition plan requirements under other recent EU legislation, and adds to pressure on the industry to prepare for possible losses. Natural disasters last year caused $250 billion in losses globally, of which only $95 billion were insured, according to Munich Re.
The EBA said its rulebook should be viewed as a “new risk management tool,” whereas other transition plan requirements focus on ensuring business models are compatible with net zero emissions by 2050.
The authority has previously recommended that banks integrate ESG into risk management. The industry has until April 18 to respond, with the guidelines’ final wording expected by the end of 2024.
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