The European Banking Authority (EBA) has released a new report examining the availability and accessibility of data on ESG risks, while also exploring the feasibility of a standardised methodology for identifying and qualifying credit exposures related to these risks.
The report finds that, although there have been marked improvements in recent years, the ESG data landscape remains fragmented. It highlights key policy initiatives such as the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS), alongside calls for greater transparency in the methodologies used to determine ESG scores and External Credit Assessment Institutions’ (ECAI) credit risk ratings, as measures expected to improve the current framework.
Credit institutions are increasingly incorporating ESG risk assessments into their operations, though the report notes that progress varies significantly across different exposure classes. Persistent challenges include issues of data availability, quality and granularity, which continue to hinder the development of more advanced assessment approaches.
The EBA observed that methodologies are most refined in the evaluation of transition risk within corporate portfolios, where some degree of standardisation is already evident through the use of sector classifications, monitoring of greenhouse gas emissions, and the analysis of counterparties’ transition plans. A similar level of consistency has been seen in the assessment of mortgage exposures, typically based on the geographical location and energy efficiency of the property collateral.
However, for other exposure classes the methodologies remain underdeveloped, with ongoing efforts to establish robust approaches for identifying and assessing ESG risks. Assessments related to environmental risks beyond climate, along with social and governance factors, are still in a largely qualitative phase.
The report also notes that while emerging practices in ESG risk evaluation are apparent, the linkage between these risks and overall credit risk levels remains limited. Only a few institutions currently apply specific measures to quantify credit risk associated with ESG factors, with a predominant focus on climate risk. Traditional assessments of governance risks continue to rely on qualitative, expert-driven methods without a unified standard.
Overall, the EBA concludes that the feasibility of designing a standardised methodology will differ considerably depending on the type of exposure and risk in question. Although strides have been made in identifying and assessing ESG risks, there remains insufficient evidence of their definitive impact on credit risk parameters. Consequently, if regulatory efforts towards standardisation are to be pursued, a phased and sequenced approach is likely to be necessary.
