ESG risks pose 'clear and present danger' to banks, EBA says

THE finance industry, including the watchdogs overseeing it, isn't doing enough to protect itself from environmental, social and governance (ESG) risks, according to the chairman of the European Banking Authority (EBA), Jose Manuel Campa.

"It's an area where we're all late and I would like to see more action not just from banks, but from all of us including regulators, if I may, as well as non-financial corporates," he said in an interview with Bloomberg Television's Tom Mackenzie. "It's a clear and present danger and we need to move forward to try to address those risks."

The comments come amid mounting concerns that ESG is being practised in a way that's often geared more toward commercial needs than toward addressing environmental and social challenges. A recent study by researchers at the European Central Bank found it remains "unclear" whether ESG is actually helping the planet.

At the same time, regulators have shown they'll no longer tolerate inflated ESG claims by financial firms. Last week, police in Germany raided the offices of Deutsche Bank and its investment arm, DWS, amid ongoing greenwashing probes. DWS has maintained it did nothing wrong, but the raid was promptly followed by the departure of the firm's chief executive.

Campa said the EBA has been "working actively" to address ESG risks and is now seeking feedback from the financial industry through a consultation process "on how best to address these concerns from the prudential framework".

In the euro area, banks are in the middle of a landmark series of climate stress tests that are being conducted by the ECB. The results won't be made public and any impact on banks' so-called Pillar 2 capital requirement will only be indirect, but the ECB says it will eventually treat climate as it does other risks.

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Campa said there's also more in the pipeline to ensure European banks are properly prepared for the risks posed by climate change.

"Earlier this year we published requirement for banks that from next year they will have to publish in the Pillar 3 disclosures on exposures to climate risk," he said. "Not ESG broadly, but on the climate related risk and I think this is an agenda we need to push going forward."

Campa appeared to reject EU discussions around potentially using capital requirements for banks to steer capital toward ESG-friendly industries. Adjustments to requirements should only be made "in order to cover potential risks that may arise from this situation", he said. BLOOMBERG