SUSTAINABLE FINANCE ROUNDUP
‘Banks to become “the Leonardo da Vinci” of the economy’, Gonzalo Gasós, EBF Senior Director Prudential Policy and Supervision
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BRUSSELS, 26 April 2023
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The role as main financiers of the economy puts banks as intermediaries in the chain of climate change preventive measures launched by authorities. This situation is particular for banks because their business is about lending money and getting it back in the future and that requires managing relevant information from the borrowers including the potential heightened risk due to climate change.
Therefore, banks are facing a daunting task with the adaptation to climate change goals due to three concurrent challenges: firstly, the gap between the supervisory demands and the actual capacity of the economy to deliver, including on the information protocols required. Secondly, the development of new processes and methodologies to manage climate risk and the new climate related data and decision-making process. Another challenge lies in the conditions against which all these developments have to be implemented as the regulatory landscape is in a state of constant evolution.
As regards supervisory requirements, there is an issue of coordination between several authorities involved, interdependent legislative and regulatory pieces and supervisory expectations. Also, there is an issue of timing mismatch between different requirements as well as requirements for banks and for the businesses. On the grounds that climate change is a more urgent objective than what the authorities, economy or society can manage in appropriate order, banks are moving forward in the mist.
The problem is compounded due to the novelty and complexity of the tasks. Policymakers and supervisors expect banks to fully understand the ins and outs of processes that fall out of their traditional financial expertise. Banks are competing to hire experts on environmental issues, sectoral technologies and developments that require in-depth knowledge to investigate every detail in the functioning of every business: shipping, railway, compressors, turbines, food processing, livestock farms, and so on. In short, banks have to become “the Leonardo da Vinci” of the economy.
This demand leads to the second challenge concerning the integration of climate change goals across the entire organisation. The operationalisation of that specific knowledge requires putting many departments of the bank at a high level of climate change expertise: the commercial teams, the risk managers, the auditors, the IT specialists, and so on. Therefore, the question is not only whether banks are capable of implementing such an ambitious supervisory demand within the required timeframe but, ultimately, the cost involved.
Thinking about solutions, supervisory authorities and banking federations must work together to stabilise requirements and define expectations accordingly. Initiatives to facilitate data accessibility like the European Single Access Point (ESAP) with information publicly disclosed, collected by authorities or reported voluntarily for the wider use, or other repositories in the private sector, are examples of good practices but more needs to be done such as publicly available EPC databases to name just one example. There are also opportunities to make good use of platforms for information sharing by banks, building on existing infrastructures like the Banks’ Integrated Reporting Dictionary (BIRD) or the European Data Warehouse.
What banks need is harmonisation and operationalization of existing requirements and initiatives under the lead of authorities. We also need to understand what could be considered credible in the eyes of regulators and authorities. The risk of greenwashing accusations is growing with the multitude of initiatives and inconsistencies. This represents a reputational risk for banks while banks are merely reflecting what is originating outside the banking industry.
The third challenge is that of multiple authorities acting upon unfinished regulation. As the saying goes, too many cooks spoil the broth. We need to streamline the regulatory requirements and avoid that the same data be requested multiple times on slightly different scopes or parameters. We need to ensure that duplications will not happen and remove existing ones. From the reporting perspective, in Europe, the European Sustainability Reporting Standards (ESRS) should serve as the main standard, while, however, being aligned to the maximum extent possible with the International Sustainability Standards Board (ISSB) standards, which should provide the global baseline for sustainability reporting.
In conclusion, not only do we need to know the destination of the climate change journey, but we also have to build the road to get there. And this can only be done via a collaborative effort between banks, authorities and the industry. The European Banking Federation recently proposed that the EU develop a Framework for Financing the Green Transition, whereby companies of different sectors could plan their transition in line with common transition paths for industry sectors. This would largely facilitate engagement with the industry and financing of the transition and developments of financial products in a clear and comparable fashion.
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For more information:
Gonzalo Gasós, Senior Director Prudential Policy and Supervision, G.Gasos@ebf.eu
Alexia Femia, Financing Sustainable Growth Adviser, a.femia@ebf.eu
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