The Report provides an initial assessment of environmental, social and governance (ESG) factors and risks for the purposes of the prudential supervision of investment firms under the Investment Firms Directive (IFD). 

The objective of the Report is to set the foundations for further considerations of the ESG aspects in the supervisory review and evaluation process (SREP) of investment firms. 

This Report builds on and complements the EBA Report on management and supervision of ESG risks for credit institutions and investment firms published in June 2021. 

The European Banking Authority (EBA) today published a Report on how to incorporate ESG risks in the supervision of investment firms. The Report also provides an initial assessment of how ESG factors and ESG risks could be included in the supervisory assessment of investment firms.  

This Report, addressed to competent authorities, sets out the foundations for integrating ESG risks-related considerations in the supervisory process of investment firms and covers the main SREP elements including: (i) business model analysis, (ii) assessment of internal governance and risk management, and (iii) assessment of risks (risk to capital and liquidity risk). 

Proportionality is a key element of the Report, which highlights the need to embed ESG considerations in a proportionate manner where the ESG factors and risks could affect the risk profile of the investment firm. This integration should be carried out taking into account not only an investment firm’s business model, size, internal organisation and the nature, scale, and complexity of its services and activities, but also the materiality of its exposure to ESG risks. 

Acknowledging the current limitations related to data and methodologies in the assessment of ESG risks, the EBA recommends that the integration of ESG aspects in the supervisory process could follow a gradual approach, prioritising the recognition of ESG risks in investment firms’ strategies, governance arrangements and internal processes, and later incorporating them in the assessments of risks to capital and liquidity. However, competent authorities are also expected to monitor and encourage further developments in the data and methodologies allowing more accurate measurement and management of ESG risks by investment firms. 

Legal basis and background 

In June 2021, the EBA published a Report on the management and supervision of ESG risks for credit institutions and investment firms in accordance with Article 98(8) of Directive 2013/36/EU (Capital Requirements Directive - CRD) and Article 35 Directive (EU) 2019/2034 (Investment Firms Directive - IFD). This Report provides common definitions of ESG risks and elaborates on the arrangements, processes, mechanisms and strategies to be implemented by credit institutions and investment firms to identify, assess and manage ESG risks. Additionally, the Report provides recommendations on how ESG risks should be included in the supervisory review and evaluation of those institutions that are subject to Title VII of CRD, in particular credit institutions. 

Following the publication of the EBA Guidelines on SREP for investment firms, the Report published today fulfils the mandate under point (d) of Article 35 of the IFD and complements the Report on the management and supervision of ESG risks for credit institutions and investment firms, published in June 2021. 

Point (d) of Article 35 of IFD mandates the EBA to develop a report providing the criteria, parameters and metrics by means of which supervisors and investment firms can assess the impact of short-, medium- and long-term ESG risks for the purposes of the supervisory review and evaluation process. 

The Report has been transmitted to the EU Parliament, the Council and the European Commission.