- Measurement of ESG risk “very limited”
- “Few” have a comprehensive strategy
- Data, definitions, resources all pose a challenge
LONDON, Aug 27 (Reuters) – Europe’s banks are slow to act on sustainability and have limited understanding of their exposure to environmental, social and governance risks, according to a report by asset manager BlackRock for the European Commission.
The report, which is intended to integrate sustainability into banking regulatory requirements, had proven controversial in view of the US company’s role as an investor in many banks.
The block executive was reprimanded in November by European ombudsman Emily O’Reilly for failing to adequately address conflicts of interest in awarding the contract to BlackRock’s Financial Markets Advisory Unit.
O’Reilly said the commission had not failed in applying its procurement process, but its conflict of interest rules were too vague and should be changed in the future.
In a 273-page report, based on data and intelligence from a number of banks and other stakeholders, released on Friday, the study said policy makers should take more action.
“Despite increased efforts by banks and regulators, this study concludes that the pace of implementation needs to be accelerated in order to achieve effective ESG integration into risk management, prudential supervision, and business strategies and investment policies,” it said Report.
Banks are increasingly coming under pressure from investors and activists for their role in the global transition to a low carbon economy, particularly for their role in funding high emissive companies in sectors such as energy and utilities.
Among the findings of the report, it is said that banks do not have a common definition of ESG risk as most lenders have yet to map how different ESG risks feed into financial risk and few have a risk strategy.
“ESG factors are widely, if sometimes superficial, built into lending policies, loan application processes and due diligence, especially for select high-risk sectors,” the report said.
“However, coverage is often limited and, for example, off-balance sheet investment activities related to advisory or debt capital markets are often not included.”
The integration of ESG risk into risk models and stress tests “is at an early stage” and most banks have yet to incorporate it into their internal risk reporting framework, he added.
Among the conclusions, the report suggested banks and regulators develop a detailed definition of ESG risks, with some stakeholders calling for ambitious strategies with measurable goals and timelines.
A commission spokesman said the executive plans to organize a discussion on the report with members of the European Parliament and other stakeholders and will use the contents of the report to help formulate future policy proposals.
BlackRock’s FMA, which operates separately from the asset management unit, said in a statement it was delighted to present its study to the commission in accordance with its mandate.
Reporting by Simon Jessop, additional reporting by Lawrence White; Adaptation by David Evans
Our Standards: The Thomson Reuters Trust Principles.