EBA published its report on management and supervision of ESG risks for credit institutions and investment firms. The report provides common definitions of ESG risks and evaluation methods needed for an effective risk management. EBA recommends incorporating ESG risks related to strategies and objectives, governance structure, and risk management. They also recommend the extension of the time horizon for strategic planning up to 10 years.
The report proposes a phase-in approach to further enhance the supervisory review and evaluation process (SREP), starting with the inclusion of climate-related and environmental factors and risks into supervisory business models and internal governance analysis.EBA will develop guidelines on the management of ESG risks and the supervision of ESG risks by EU competent authorities, before the end of the year.
Regarding the role of internal audit, EBA recommends:
- Recording the ESG factors and risks under the existing audit process and including an effective communication with all parties involved in the integration of ESG risks into its activities
- Assessing the ESG aspects by supervisors and considering when evaluating the 3 lines model, in regard to consistency in the implementation of ESG risk-related objectives and /or limits in the risk-taking, risk management, and internal audit function.
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