ESG risk management framework for the financial sector (ESGRM)

In recent years, the interplay between the financial system and Environmental, Social, and Governance (ESG) aspects has gathered increased relevance and attention. The financial sector plays an essential role in mitigating the effects of ESG risks, while being itself exposed to their impacts under several perspectives. Among such risks, environmental and climate ones have become the most urgent, considering the occurrence, severity and spread of climate change-related natural disasters, the political commitments to climate neutrality, and the massive resources needed to make the economy more “sustainable”.

Context

In line with the European Green Deal, the European Union has adopted several initiatives to ensure an appropriate integration of ESG considerations in the regulation and supervision of the financial system. The national authorities responsible for its supervision are hence increasingly required to identify, monitor, and assess the impact of ESG risks on the financial sector, to oversee compliance with ESG-related obligations, and to adopt appropriate supervisory responses. Financial supervisors shall also be particularly proactive in addressing “greenwashing” practices, which occur when sustainability-related statements or actions do not clearly and fairly reflect the underlying sustainability profile of a company or financial product, ultimately misleading consumers, investors, or other market participants.

In 2022, DG REFORM proposed this flagship support project to address the need for effective ESG supervision, as the EU sustainable finance agenda seeks to steer capital towards the green economy. With this action, financial supervisors are supported in overcoming the challenges associated with the proper implementation of the EU sustainable finance framework, enhancing their capacity to monitor and address ESG risks, to the benefit of financial stability and investors’ protection.

Support delivered

Involving 12 financial supervisors from 11 Member States (Bulgaria, Croatia, Cyprus, Finland, France, Greece, Ireland, Italy, Latvia, Romania, Slovenia), the project aims at enhancing financial supervisors’ capacity to react to challenges associated with ESG risks in the most holistic and comprehensive way possible. The support will hence address sustainability from various perspectives, fitting the diverse needs of supervisors covering the banking, capital markets, and insurance sectors. The initiative will be implemented through a strong partnership between the Commission and its Joint Research Centre based in Ispra, academic institutions, the European Supervisory Authorities (ESAs) and the private sector.

Over the next 3 years, the 12 authorities involved will work altogether within different building blocks. The project will increase their capacity to duly navigate the complexity of the regulatory framework, to actively exploit ESG-relevant data and information, and to establish – on their basis – robust supervisory tools and methodologies to monitor and address ESG risks. The project will also entail the elaboration of policy initiatives to address the insurance protection gap for natural catastrophes – a subject that has prominent relevance in the proactive fight to climate change, and the development of tools to tackle greenwashing, drawing upon innovative solutions and advanced technologies.

Expected results

The ultimate goal of this initiative is to strengthen the NCAs’ ability to implement the emerging EU sustainable finance regulatory framework, to address ESG risks through appropriate methodological and analytical tools, to guide supervised institutions and companies in setting up appropriate systems, processes, and controls to manage ESG and climate risks, to raise awareness of public and private stakeholders, with a view to enhance public trust in, and promote the development of sustainable finance.