EU: European Commission consults on ESG ratings and sustainability factors in credit ratings
The European Commission launched a targeted consultation  (with feedback due on 6 June 2022) on the functioning of the ESG ratings market in the EU and on the consideration of ESG factors in credit ratings.
This consultation follows the publication of the renewed sustainable finance strategy in 2021 where the Commission gathered preliminary feedback on the quality and relevance of ESG ratings for investment decisions, on the level of concentration in the market for ESG ratings and need for action at EU level. Stakeholders indicated that better comparability and increased reliability of ESG ratings would enhance the efficiency of this fast-growing market, helping the progress towards the objectives of the EU Green Deal.
This consultation also seeks views from market participants on the use of other types of tools that can be offered by sustainability-related providers, including research, controversy alerts, rankings, and others.
The consultation will directly feed into an impact assessment that the Commission will prepare in 2022 to assess in detail the impacts, costs and options of a possible EU intervention. Notably, in February 2022, the European Securities and Markets Authority (ESMA) also published a call for evidence which, amongst other matters, looked at possible costs of supervision if these ESG service providers become subject to supervision. ESMA’s work will also feed into the impact assessment by the Commission.
Based on the results, the Commission may propose an initiative (legislative or not) to foster the reliability, trust and comparability of ESG ratings by early 2023.
EU: EFRAG consults on draft sustainability reporting standards under CSRD
EFRAG is seeking views  from constituents on the first set of European Sustainability Reporting Standards (ESRS) under the CSRD. The future standards will include 3 categories.
- Cross-Cutting Standards – intended to be applicable to all sustainability subject matters, including general principles, strategy, governance and materiality assessment of impacts, risks and opportunities.
- Topical Standards – sector-agnostic disclosure requirements (Environment: Climate Change, Pollution, Water and Marine Resources, Biodiversity and Ecosystems, Resource use and circular economy; Social: Own workforce, Workers in the value chain, Affected Communities, Consumers and end-users; Governance: Governance, risk management and internal control; Business Conduct), and
- Sector-Specific Standards – these standards are not included in the consultation and are still being developed by EFRAG’s Technical Expert Group.
These draft standards, organised in exposure drafts (EDs) also take account of disclosures required under other EU legislation and proposals, including the Sustainable Finance Disclosure Regulation, Article 8 of the Taxonomy Regulation together with obligations under the proposed Corporate Sustainability Due Diligence Directive. The EFRAG indicated that international sustainability reporting initiatives were also considered along with the recent SEC proposal on climate-related disclosures. The EFRAG is gathering feedback on the EDs by 8 August 2022 and is due to submit the first set of draft ESRS to the Commission by November 2022.
EU: ESAs proposed RTS on integrating EU SFDR PAIs into STS securitisation disclosure frameworks
The European Supervisory Authorities (EBA, European Insurance and Occupational Pensions Authority (EIOPA), and ESMA), known as ESAs, are consulting on draft Regulatory Technical Standards (RTS) setting out the content, methodologies and presentation of information in respect of the sustainability indicators in residential mortgage and auto loan / lease assets in traditional and synthetic STS securitisations . The proposed draft RTS aim to facilitate disclosure by the originators of the “principal adverse impacts” (PAIs) of assets financed by STS securitisations on ESG factors (i.e. environment and society), to a large degree integrating metrics introduced by the Sustainable Finance Disclosure Regulation (SFDR) and the EU Green Taxonomy.
In some key respects, these draft RTS diverge from the SFDR in order to take into account the specific characteristics of securitisation products and the relevant legal framework. The paper focuses on the following subsections: 1) the means and format of disclosure; 2) sustainability policies of the originators and the criteria for selection of the assets in the pool; 3) selection of PAI indicators to be reported in the annual principal adverse sustainability impacts statement.
The consultation paper suggests that it may be appropriate to facilitate the ability of originators of different types of securitisations to provide information on PAIs on sustainability, and thus ESAs seek views on proposed indicators for other types of underlying assets, in particular corporate debt, commercial real estate and trade receivables.
The closing date for responses to the consultation is 2 July 2022.
EU: EBA launches discussion on the role of environmental risks in the prudential framework
The EBA published  a long-awaited Discussion Paper on the role of environmental risks in the prudential framework for credit institutions and investment firms. The Paper explores whether and how environmental risks are to be incorporated into the Pillar 1 prudential framework. It launches the discussion on the potential incorporation of a forward-looking perspective in the prudential rules. It also stresses the importance of collecting relevant and reliable information on environmental risks and their impact on institutions’ financial losses. The consultation runs until 2 August 2022.
The Paper raises the question as to whether the current prudential framework can account for the new risk drivers that are likely to impact on all traditional risk categories, such as credit, market and operational risks.
The Discussion Paper provides an analysis of the extent to which environmental risks are already reflected in the Pillar 1 own funds requirements via internal and external ratings, valuation of financial instruments and collateral, or scenario analysis.
The Paper takes a risk-based approach to ensure that the prudential framework reflects underlying risks and supports resilience of financial institutions. The purpose of the prudential framework is not to achieve specific environmental objectives. These could be supported by the risk-based framework, particularly if coupled with other policy actions. This message was consistent with the conclusions delivered by the Bank of England (as per above) as part of CBES.
While the Discussion Paper focuses on Pillar 1 own funds requirements, it highlights the need for a holistic regulatory approach and should be seen as part of the EBA’s broader work in the area of ESG risks, which includes transparency, risk management, Pillar 2 supervision and macroprudential capital buffers. The Paper also highlights interlinkages with the accounting framework.