Criteria for the management of environmental and social risks as well as governance risks will soon impose additional capital requirements on banks, according to banking executives. Therefore, it will become more expensive for businesses to deal with such risks to the extent that they are financed by the credit system.
More specifically, the European Banking Authority has already started a consultation on the guidelines concerning the management of ESG risks by credit institutions since the implementation of the new directive on bank capital requirements is expected on 1.1.2025.
Banks will soon be called upon to deal with the risks arising from the transition to a climate-neutral EU economy and all this requires strict internal procedures for their operation but above all transferring these procedures to their customers.
The dangers
Climate change, environmental issues, social problems and governance matters pose significant challenges to the economy that affect the financial sector. Τhe institutions’ risk profile and business model can be affected by ESG risks, in particular environmental risks, while dealing with significant natural risks affecting the economy.
What does this mean for Greek banks?
Following the major natural disasters that hit our country, Greek banks seem particularly vulnerable. At the same time, it should be noted that many companies, mainly due to their small size, are quite behind in actions that protect them from ESG risks.
To ensure the safety and soundness of institutions in the short, medium and long term, the guidelines set requirements for the internal ESG risk management procedures and regulations that each credit institution should have in place.
These guidelines set out principles for the development of the banks’ plans under the new Capital Requirements Directive (CRD6) which will apply as of 1.1.25.
Five issues affecting the capital needs of banks
Banks need to ensure that they are able to properly identify and measure ESG risks through sound processes, a mix of methods and scenarios.
Institutions should integrate ESG risks into their regular risk management framework by considering risks that may arise in the areas of reputation, liquidity, and business model.
Institutions should integrate ESG risks into their regular processes and operational programs.
Institutions should monitor ESG risks through effective internal reference frameworks and a series of retrospective measurements that will also be included in the stress tests to which banks are subjected.
Banks should develop prudential (transition) plans based on capital adequacy metrics to address these risks.
