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Risk appetite statements incorporating ESG risks would then cascade down to group entities, business lines and units, in close interaction with the implementation of the business strategy.
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Whilst the EBA gives particular prominence to climate and environmental risks in the development of the ESG riskrelated banking regulatory framework, it is nonetheless essential that institutions also take measures to advance their identification and management processes for social and governance risks, in light of their potential significant impact (see Chapter 2). These measures should aim at ensuring a robust and forward-looking management of social and governance risks, building where appropriate on existing arrangements already implemented by institutions e.g. through the integration of governance factors of counterparties in credit risk and operational risk assessments or the integration of social factors in client-related processes.
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The implementation of the business strategy and related strategic objective and/or limit can be accompanied by a number of actions, including adjustments in the remuneration policy – this would ensure that ESG risk-related objectives and limits receive proper management attention and the development of adequate internal resources and expertise related to identifying, assessing and managing ESG risks
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Institutions are, and should remain, responsible for designing their business strategies, including their approach to supporting sustainability policy objectives. However, the extent to which an institution’s overall exposures diverge from those objectives could serve as an indicator of the scale of its transition risk. On the other hand, by steering business in a direction that is consistent with the expected environmental and social transformation, institutions are more likely to avoid the negative financial impacts from ESG risks.
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The engagement policy should consider at least two perspectives that complement each other: first, the internal perspective, i.e. the capacities and expertise an institution needs to build up in order to understand the business models of its counterparties and the impact of ESG factors on these. Second, the external perspective, i.e. how an institution can interact with borrowers, investee companies and possibly other stakeholders (e.g. academia) to mitigate ESG risks for the institution that originate from these stakeholders. With regard to the internal perspective, institutions should make efforts that are proportionate to the size, nature and complexity of their activities.
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This implies developing an understanding of and monitoring how ESG factors can affect macroeconomic conditions, as well as relevant sectoral business environments, for instance through decreases in output, changes in customer preferences or shifts in technology, and how this could in turn have negative financial implications for the institutions.
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Taking into account that the outcome of such an analysis depends greatly on the chosen scenario, the underlying assumptions and models used, institutions are advised to apply a range of different plausible scenarios for informing their business strategies. By way of example, institutions could base themselves on the three representative scenarios developed by the Network for Greening the Financial System (NGFS) which are the ‘orderly’, ‘disorderly’ and ‘hot house world’ scenarios, but would necessarilyhave to break them down from the global and macroeconomic to the microeconomic level. In the EU context, institutions could consider a scenario representative of EU environmental objectives and assess the implications for their business strategies of the actions planned under the European Green Deal and of the realisation of CO2 emissions reductions targets set for 2030 and 2050. Institutions could draw strategic conclusions from the outcome of such analyses depending on the estimated impacts and the likelihood they associate with each scenario. However, from a prudential perspective, institutions should also prepare for less likely, adverse scenarios.
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When applying scenario analysis, the specific characteristics and risks of the institution’s business model need to be taken into account. Different risks may arise depending, among others, on the geographical location, counterparties’ strategies and the economic sectors of the exposures.
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From a strategic point of view, institutions with a substantial proportion of their business in non-sustainable activities may face, in addition to potential financial impacts from exposures to sectors under pressure from stricter environmental or social regulation, reputational issues that affect their customers or investor base. The same could apply for institutions that lack commitment to sustainability objectives.
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Also at the European level, a main legal reference for framing ESG factors is the ‘Regulation on sustainability‐related disclosures in the financial services sector’ (SFDR) (2019/2088). The SDFR aims at enhancing transparency and informing investors about sustainability related aspects, particularly the ‘principal adverse impacts’ that investment decisions have on sustainability factors and the sustainability characteristics or objectives of financial products. The SDFR defines sustainability factors as ‘environmental, social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters’. The EBA, EIOPA and ESMA (collectively, the ‘ESAs’) have developed, through their Joint Committee, draft regulatory technical standards to further specify the content, methodologies and presentation of disclosures related to these sustainability factors
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Institutions would benefit from implementing at least a minimum set of longer-term key performance indicators (KPIs) that would allow them to monitor the development of their portfolios, with a view to evaluating and ensuring their longterm resilience as well as supporting the setting of strategic objectives. these longer-term KPIs on the basis of their internal ESG risk assessment methodologies, e.g. considering insights gathered from portfolio alignment or risk framework methods. In addition, they should duly consider the developing regulatory framework for ESG disclosures. This includes the EBA’s proposal for obliged institutions to disclose their GAR as part of disclosure requirements under the Taxonomy Regulation and as part of their Pillar 3 disclosures 155, other indicators proposed by the EBA for Pillar 3 disclosures such as the carbon footprint and scope 3 emissions of institutions’ portfolios (e.g. corporate loan portfolios)
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As set out in the EBA Guidelines on internal governance, with regard to internal governance and risk management arrangements, institutions should consider a principle of proportionality that is based on, inter alia, their size, nature and complexity. This general principle of proportionality applies with regard to the ESG risk management framework. At the same time, the application of the principle of proportionality in the context of ESG risks also means that any specificities of ESG risk should be duly taken into account, with a view to ensuring that risk management arrangements are proportionate to institutions’ risk profiles. In particular, it should be noted that smaller institutions are not immune to ESG risks and could in some cases be even more exposed to them. Institutions should not prematurely consider thatESG risks are immaterial owing to their longer-term nature but should consider their implications over the short, medium and longer-term time horizons.
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Institutions should take into account the role of the Taxonomy as a cornerstone of EU initiatives on sustainable finance and reflect on how to develop their approach considering their strategic objectives and regulatory (disclosure) requirements. Institutions in the scope of the NFRD should take into account the fact that they will have to disclose how and to what extent their activities are aligned with the taxonomy, which will inform stakeholders about their positioning and strategies
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Amendment to Art.25: Suitability & Appropriateness Les rapports périodiques doivent inclure la manière dont les stratégies ont été mises en œuvre ainsi que les calculs ponctuels de pourcentage d’alignement à la Taxonomie
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Art. 21 & 23, Risques: Prise en compte des risques de durabilité dans le système de gestion des risques de l’établissement et mise à jour des modèles opérationnels et organisationnels en fonction (ex: impact d’un abandon des investissements dans les énergies fossiles, impact d’une marée noire sur les investissements dans le domaine pétrolier)

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