EBA Report on ESG risks in Prudential Framework for IF

On 12 October 2023 the European Banking Authority (EBA) published a Report on the role of environmental and social risks in the prudential framework of credit institutions and investment firms.

POLICY RECOMMENDATIONS ON INVESTMENT FIRMS

As a short-term action, the EBA recommends that the treatment of E&S risks for investment firms remain under the Pillar 2 framework for all K-factors including those related to RtC. Accordingly, the EBA does not recommend changing, in the short term, the prudential framework for investment firms independently from the CRR.

However, as a medium- to long-term action, the EBA recommends extending the potential changes made to the CRR/CRD framework to the investment firms’ prudential framework, where applicable. In particular, this would concern the parts of the investment firm framework that are directly or very closed related to the CRR. This includes the K-factors related to market risk, trading book concentration risk, CVA and counterparty credit risk. These should be replicated for investment firms, to ensure overall consistency while maintaining proportionality.

At this stage, the EBA does not recommend introducing differentiating factors for commodity dealers in the scope of IFD/R as they currently apply the K-factors in line with the CRR and should apply the same requirements in case of any improvement in the CRR framework in the future for E&S risks. As a medium- to long-term action, the EBA will reassess, subject to further evidence and analysis, the appropriateness of introducing differentiating factors for commodity dealers to further reflect the concentration risk of those particular business models.

(source: EBA Report on the role of environmental and social risks in the prudential framework of credit institutions and investment firms)