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European financial supervisors to take sustainability into account

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The European Commission has proposed that the European Supervisory Authorities (ESAs) incorporate environmental, social and governance (ESG) risks into their work. 

The proposal is one of several measures it presented today to reform the ESAs. These include EIOPA, the supervisory authority for pension schemes and insurers, EBA, for the banking industry, and ESMA, which is responsible for macro-prudential regulation.

The Commission’s ESG-related proposals were intended to make sure “sustainability considerations are systematically taken into account in supervisory practices at the European level”. It said the ESAs could help prevent disjointed moves in the area of sustainable finance across the EU. 

By incorporating ESG risks into their work, the ESAs would be able to “monitor how financial institutions identify, report and address risks that ESG factors may pose to financial stability, thereby making financial markets activity more consistent with sustainable objectives”, according to the Commission. 

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“The ESAs will also provide guidance on how EU financial legislation can integrate sustainability considerations and promote the implementation of these rules.”

Enhancing the ESAs’ role in assessing ESG-related risks was one of the recommendations made by the High Level Expert Group (HLEG) on sustainable finance to the Commission in its interim report in July. 

The advisory body suggested EIOPA could include ESG risks in its stress tests of pension funds – an idea that PensionsEurope, the European umbrella association of national pension fund trade bodies, has rejected.

In its submission to HLEG’s consultation, PensionsEurope argued that there was “no clear picture in the scientific literature whether risks and returns of ESG portfolios are actually systematically different from those of conventionally managed portfolios”.

The HLEG also recommended that the ESAs increased their knowledge and expertise on sustainability. PensionsEurope noted that European pension funds did not have a harmonised prudential regime and instead fell under the supervision of national supervisors.

“We believe it is necessary that both European and national supervisors start building up capacity and tools in order to be able to consider ESG factors in the future in financial supervision while striving for supervisory convergence,” it said.

The HLEG’s consultation on its early recommendations closes today. It is due to present a final report in December and the Commission has said it would decide on any concrete follow-ups by the end of next year.

The next step for the Commission’s ESA reform proposals is for them to be discussed by the European Parliament and the Council. Other aspects of the proposals include introducing industry contributions to fund the ESAs, changing the ESAs’ governance structures by introducing independent executive boards, and giving ESA stakeholders a stronger say in the guidelines and recommendations issued by the supervisory authorities.

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