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396 extracts

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ESG risks can drive operational risk, e.g. legal risk, and reputational risk that can arise as a result of the institution’s activities. For instance, an institutionthat hasfinancing activities that are publicly controversial (e.g. hydraulic fracturing or fossil fuel financing) might see their reputation impacted or might be subject to legal claims. As mentioned earlier in this report, institutions may also be directly subject to the physical risks stemming from climate-related and environmental factors. Institutions should accordingly ensure that their operational risk management adequately considers physical risk impacts, with a view to ensuring their business continuity and ability to recover from disasters, taking into account their geographical location, physical assets and outsourcing arrangements
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As evidenced in the EBA’s survey on sustainable finance market practices201, there is a growing consensus in the industry to consider ESG risks as drivers of existing prudential risks, with the exception of liquidity risk. However, it is deemed important not to overlook liquidity and funding risk. Indeed, ESG factors could also result in funding issues for an institution or make some assets less liquid.
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ESG risks can drive market risks. For example, higher downside risks can be associated with financial instruments issued by companies that are environmentally unsustainable or socially irresponsible. Understanding and establishing a direct relationship between how ESG risks impact issuers and how the value of the related financial instruments changes is challenging, but it is important to assess and evaluate both the risk of losses and of increased volatility
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The EBA also sees a need to gradually develop methodologies and approaches to test the resilience of institutions to the long-term negative impacts of environmental, social and governance factors. The initial objective of this testing should be to assess the long-term resilience of institutions’ business models and support the setting of ESG-risk-related strategic objectives and/or limits. When these methodologies and approaches are sufficiently tested, it will provide institutions with additional input into the assessment of their ICAAP and ILAAP. This gradual approach also implies the prioritisation of testing resilience to the environmental factors, for which more data and methodologies are available, followed by social factors.
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Due to the less advanced approach for social and governance risks, developing their understanding, policies and practices related to social and governance risks and, based on data availability and considering the use of proxies, calculate indicators. Institutions could, for instance, try and identify outstanding assets of counterparties that are particularly exposed to social and governance issues, for instance by replicating the indicators contained in Annex 1 of this report or in Annex 1 of the delegated regulation supplementing the SFDR, as regards principle adverse impacts, and tailor them to their own business model and types of exposures.
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In order to build ESG-related testing capabilities, the EBA sees the need for institutions to build their related data infrastructures, proportionate to their size, complexity, risk and business profile, allowing for testing to be performed that covers all material risk factors.
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Institutions should take into account that ESG risks can affect, through micro-prudential and macro-prudential factors, both their profit and loss account and their balance sheet. ESG factors, both independently and through the aforementioned profit and loss account, can affect an institution’s capital and liquidity adequacy, the risk weight of its assets, and its access to capital and liquidity
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Additional and complementary measures that institutions may take to mitigate ESG risks depend on the source of the ESG risks. For instance, if ESG factors impact credit risk, institutions can consider credit risk mitigation tools (e.g. guarantees and collateral). If operational risk is impacted, institutions can consider taking corrective measures (e.g. insurance policies). Market risk mitigation could entail the diversification of portfolios, thereby reducing concentration risks, amongst others.
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In line with their business strategy and risk appetite institutions may incentivise their counterparties to mitigate ESG risks and transition towards more sustainable business models. This could, for instance, entail setting the interest rate of an environmentally sustainable loan at a level consistent with higher resilience to such risks and the associated improved creditworthiness under otherwise unchanged conditions. For credit institutions originating sustainable lending, the interest rate adjustment process could be linked to the achievement of sustainability targets by the client over a predefined period of time, in which climate-related and environmental risks are reduced. Similarly, the increase of ESG issuances with attractive funding costs and linked to a strict use of proceeds would provide a basis for pricing differentiation.
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The identification of exposures affected by climate-related risks is the basis of a climate risk stress test. Up until now, only limited empirical and sufficiently granular data exist to measure actual climate risk exposures. Moreover, classifying green versus non-green exposures in a consistent manneris currently one of the major challenges. In addition, translating borrower level criteria into supervisory data requirements at exposure class level also appears to be fraught with operational issues as more granular information would be needed at activity level to identify those borrowers that are particularly exposed to climate risk. Moreover, integrating input data with a broader set of climate risk indicators, such as those defined by external data providers, or with public information on the borrower, could pose significant comparability and data quality issues.
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Transition risks vary across sectors depending on the pace of adaptation and can change in the future: early adaptation (electric cars) vs. late adaptation (coal power station). In light of this, historical information would not help the modelling of these risks especially in the long run. Therefore, to make an accurate assessment, banks require a methodology which also embeds these forward-looking features and allows major differences in risks to be capture across various sectors or companies.
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By the same token, a clear allocation and distribution of duties and tasks related to ESG risks between specialised committees of the management body in its supervisory function, where applicable, is also key. Existing or newly established committees should facilitate the development and implementation of a sound internal governance framework with regard to ESG risks and assist the management body in its supervisory function with regard to the extent to which institutions’ activities are exposed to ESG risks. Specialised committees, where established, should have members who have sufficient knowledge and experience with regard to ESG risks.
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Moreover, the institution could enter into a constructive dialogue with counterparties that are highly exposed to ESG risk to eliminate or at least reduce the source of ESG risks deriving from the counterparty to a level below the maximum limit set in the risk appetite framework. Further examples could consist of setting up an ESG scoring system (see description of the exposure method in the previous chapter) and modifying credit conditions for borrowers included in an exclusion list, on the basis of their ESG score
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Management bodies should ensure that the organisational structure of institutions considersthe potential interaction between ESG risks and financialrisks, and that the former can drive the latter, including in the long run. In general, neither ESG risks nor existing financial risks should be managed or monitored on an isolated basis, but jointly
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For physical risks and transition risk, a high degree of granularity appears to be warranted, as it allows the differences in vulnerability within countries or sectorsto be taken into account. Institutions should try, for instance, to identify the share of their counterparties’ assets located in geographical areas that are more vulnerable to acute or chronic physical risks and any measures taken by them to mitigate the vulnerability of those specific assets.

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The Securities and Futures Commission (SFC) of Hong Kong is the independent organization responsible for regulating the securities and futures markets in Hong Kong. Published by the SFC, “The Strategic Framework for Green Finance” addresses three main topics: (i) the importance of listed companies, asset managers, and investment products to issue detailed and accurate disclosures pertaining to ESG factors and climate risk, (ii) the need for asset managers in Hong Kong to develop ESG-related investment products, (iii) Hong Kong’s effort to establish itself as an international hub of green finance.
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The Securities and Futures Commission (SFC) of Hong Kong is the independent organization responsible for regulating the securities and futures markets in Hong Kong. Published by the SFC, “The Strategic Framework for Green Finance” addresses three main topics: (i) the importance of listed companies, asset managers, and investment products to issue detailed and accurate disclosures pertaining to ESG factors and climate risk, (ii) the need for asset managers in Hong Kong to develop ESG-related investment products, (iii) Hong Kong’s effort to establish itself as an international hub of green finance.
Le reporting extra-financier des investisseurs permet d’évaluer la prise en compte de critères ESG dans les politiques d’investissements. L’objectif du ministère est d’améliorer la transparence de l’information auprès des épargnants et de mobiliser les investisseurs en faveur de la transition écologique

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Le reporting extra-financier des investisseurs permet d’évaluer la prise en compte de critères ESG dans les politiques d’investissements. L’objectif du ministère est d’améliorer la transparence de l’information auprès des épargnants et de mobiliser les investisseurs en faveur de la transition écologique
The TCFD developed four widely adoptable recommendations that are supported by key climate related financial disclosures—referred to as recommended disclosures. In addition, there is guidance to support all organizations in developing disclosures consistent with the recommendations as well as supplemental guidance for specific sectors and industries.
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The TCFD developed four widely adoptable recommendations that are supported by key climate related financial disclosures—referred to as recommended disclosures. In addition, there is guidance to support all organizations in developing disclosures consistent with the recommendations as well as supplemental guidance for specific sectors and industries.
The TCFD developed four widely adoptable recommendations that are supported by key climate related financial disclosures—referred to as recommended disclosures. In addition, there is guidance to support all organizations in developing disclosures consistent with the recommendations as well as supplemental guidance for specific sectors and industries.
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The TCFD developed four widely adoptable recommendations that are supported by key climate related financial disclosures—referred to as recommended disclosures. In addition, there is guidance to support all organizations in developing disclosures consistent with the recommendations as well as supplemental guidance for specific sectors and industries.
The Principles for Sustainable Insurance (PSI),developed by the UN Environment Programme’s Finance Initiative, provide global guidance on the integration of environmental, social, and governance (ESG) risks into insurance underwriting. The purpose of the tool is to foster a resilient insurance industry based on holistic and far-sighted risk management in which ESG issues are considered.

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The Principles for Sustainable Insurance (PSI),developed by the UN Environment Programme’s Finance Initiative, provide global guidance on the integration of environmental, social, and governance (ESG) risks into insurance underwriting. The purpose of the tool is to foster a resilient insurance industry based on holistic and far-sighted risk management in which ESG issues are considered.
Le présent avis a pour objet de donner des indications aux émetteurs assujettis (à l’exception des fonds d’investissement) sur l’information continue relative aux questions environnementales qu’ils sont actuellement tenus de fournir en vertu de la législation en valeurs mobilières. Le présent avis apporte des précisions sur les obligations d’information existantes en matière d’environnement; il ne modifie aucune obligation légale actuelle ni n’en crée de nouvelle. Il a pour but : 1) d’aider les émetteurs à définir quels éléments d’information environnementale ils doivent diffuser, et 2) de les aider à améliorer ou à compléter cette information, au besoin.

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Le présent avis a pour objet de donner des indications aux émetteurs assujettis (à l’exception des fonds d’investissement) sur l’information continue relative aux questions environnementales qu’ils sont actuellement tenus de fournir en vertu de la législation en valeurs mobilières. Le présent avis apporte des précisions sur les obligations d’information existantes en matière d’environnement; il ne modifie aucune obligation légale actuelle ni n’en crée de nouvelle. Il a pour but : 1) d’aider les émetteurs à définir quels éléments d’information environnementale ils doivent diffuser, et 2) de les aider à améliorer ou à compléter cette information, au besoin.
-The Securities Exchange Commission issued an interpretation to provide guidance for public companies on disclosure requirements regarding climate change matters. This interpretation is a reminder of company’s obligation to consider climate change as they prepare disclosure documents to regulators and investors. The SEC identifies three key areas in this interpretation (i) background and purpose of interpretive guidance, (ii) historical background of SEC environmental disclosure, (iii) overview of rules requiring disclosure of climate change issues
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-The Securities Exchange Commission issued an interpretation to provide guidance for public companies on disclosure requirements regarding climate change matters. This interpretation is a reminder of company’s obligation to consider climate change as they prepare disclosure documents to regulators and investors. The SEC identifies three key areas in this interpretation (i) background and purpose of interpretive guidance, (ii) historical background of SEC environmental disclosure, (iii) overview of rules requiring disclosure of climate change issues
The Principles for Responsible Investment were developed by an international group of institutional investors reflecting the increasing relevance of environmental, social and corporate governance issues to investment practices. The process was convened by the United Nations Secretary-General. This text shows what are the six principles and possible actions to make for each of them.

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The Principles for Responsible Investment were developed by an international group of institutional investors reflecting the increasing relevance of environmental, social and corporate governance issues to investment practices. The process was convened by the United Nations Secretary-General. This text shows what are the six principles and possible actions to make for each of them.