The revised SREP Guidelines strengthen ESG risk integration, but SFL calls for greater clarity on misalignment with climate goals, time horizons and group-wide risks

SFL welcomes the European Banking Authority’s (EBA) revised Guidelines on the Supervisory Review and Evaluation Process (SREP), pointing to the more robust integration of environmental, social and governance (ESG) considerations across the different SREP building blocks. We consider this an important step in strengthening the prudential framework’s capacity to identify, monitor and address ESG risks for banks and for financial stability. We also positively viewed the emphasis on simplifying the supervisory framework to improve supervisory effectiveness. 

SFL has consistently called for a more forward-looking and integrated approach to the treatment of ESG risks within prudential supervision. In an increasingly uncertain world, and given the significant data gaps, uncertainty and methodological constraints in the assessment of ESG risks, further clarification on the treatment of these and other emerging risks in the SREP Guidelines would be beneficial in several areas. This need is particularly evident in the supervisory treatment of transition planning processes for climate change, banks’ misalignment with climate objectives, the time horizon over which risks are assessed and the treatment of cross-border groups.

Transition planning process

We welcome the inclusion of the assessment of the robustness of banks’ prudential transition planning processes within the Business Model Analysis (BMA). However, this assessment is not consistently reflected across other SREP building blocks, including the assessment of risks to capital. Robust transition planning processes are vital for monitoring banks’ resilience to the transition towards a sustainable economy. To ensure that risk assessment and corresponding mitigation measures are well evaluated, it should be treated as cross-cutting elements of the entire SREP.

Misalignment with climate objectives

Unlike the EBA guidelines on ESG risks, the SREP Guidelines do not consistently refer to the term ‘alignment’ with EU objectives in the context of assessing transition risk. This is a key part of the transition planning process for climate and central in the assessment of a banks’ transition risk. We therefore recommended embedding this concept more explicitly, enabling supervisors to better assess the coherence and credibility of banks’ transition plans.

Time horizon

ESG risks often materialise over longer time horizons than those typically applied in business and capital planning. While the revised Guidelines include references to horizons of at least 10 years, SFL called for greater consistency in the treatment of time horizons across the framework, noting that divergent time periods are currently specified across business model analysis, credit risk management and capital assessment. A more consistent timeline would thus both guarantee simplicity and proper integration of ESG considerations in risk assessments.

Cross-border groups

Matters on the supervision of cross-border banking groups were also addressed in the Guidelines and SFL supports the emphasis on consolidated, group-wide assessments as the basis for comprehensive prudential oversight. We however also stressed the importance of identifying risk concentrations and contagion channels across borders and sectors arising within banking groups, which should be supported by effective information-sharing within the colleges of supervisors to ensure vulnerabilities at the entity level are properly assessed in their group-wide context.

Overall, SFL supports the direction set by the revised SREP Guidelines, while urging for further clarification and harmonisation to ensure that ESG risks are assessed consistently over appropriate time horizons, that misalignment with climate objectives is addressed more explicitly, and that supervisory practices are up to date with the growing complexity of cross-border financial groups.

The full response can be found below.