Published on October 24 by the European Banking Authority (EBA), the Report on the integration of ESG risks in the supervision of investment firms, provides an initial assessment of environmental, social and governance (ESG) factors and risks for the purposes of the prudential supervision of investment firms.

EBA’s policy recommendations encompasses the following:

Business model analysis

To ensure appropriate integration of ESG considerations into the supervisory framework, the EBA sees the need to embed ESG factors and risks in the scope of the supervisory review. By taking into account the investment firm’s business model, size, internal organisation and the nature, scale, and complexity of its services and activities, as well as the materiality of its exposure to ESG risks.

Internal governance and risk management

The ESG considerations should be embedded in the assessment of the investment firm’s internal governance and firm-wide controls, including the assessment of how ESG factors and risks are incorporated into internal governance, the functioning of the management body, the risk culture, remuneration policies and practices, risk management, information systems and internal controls.

Risks

Where ESG factors and risks are relevant and material for an investment firm, they should be progressively and proportionately integrated into the supervisory assessment of investment firms’ risk to capital and liquidity risk.

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.