ESG Data

Mainstreaming sustainability into risk management is a fundamental requirement for banks and the focus so far has been on the impact on the value of assets. In this respect, there have been proposals for regulatory incentives within pillar I capital requirements (i.e. the introduction of brown penalising factor or green supporting factor) of a bank, especially in order to include ESG in credit ratings into the regulatory capital framework. Others suggest the inclusion in pillar II which would enable supervisors to adopt a more tailored approach and would also permit a more rapid implementation as the revision of pillar II is programmed for 2020. Disclosure in pillar III is realistically not enough to foster the necessary transition. For banks, an important part of the story is climate risk. Regulatory intervention must be wary of unintended consequences. If the objective is the transformation of industry, new investments to reduce the carbon footprint will require the support of the banking system in the brown to green transition. There are also challenges specifically related to data collection from small companies, which are not equipped to collect and provide the necessary data. This means that models and stress tests will be based on the application of data based on large exposures. Moreover lack of data will be more severe in countries where there are more SMEs.