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Banks across Europe may have to include environmental and social risks in their capital requirements and risk management under new recommendations by the European Banking Authority (EBA).
“Environmental and social risks are changing the risk profile for the banking sector and are expected to become more prominent over time,” the authority said in a recent report.
“They affect traditional categories of financial risks, such as credit, market and operational risks. Hence, environmental and social factors may affect both the risks faced by individual institutions and the financial stability of the entire financial system.”
Among other things, the EBA is proposing to require institutions to identify whether environmental and social factors constitute triggers of operational risk losses.
The new risk approach is the first in the world as the EBA is “the first authority publishing specific suggestions on how to practically incorporate E&S risk considerations into the prudential framework,” Jacob Gyntelberg, director of economic and risk analysis at the EBA, has told Bloomberg in an interview.
Some banks in Europe have already started to reduce funding to oil and gas projects as part of their own climate targets.
The most drastic measure yet was taken earlier this year by France’s biggest bank, BNP Paribas, which said in May that it would no longer provide any financing for developing new oil and gas fields regardless of the financing methods. The bank also pledged to reduce its financing for oil exploration and production by 80% by 2030 as part of its energy transition goals.
Climate change is the single largest motivation of investment institutions to decide to exclude companies from their portfolios, a newly launched ‘exclusion tracker’ showed earlier this month.
Pension funds and other institutional investors in Europe have excluded some major oil and gas companies from their portfolios, while some European banks have scaled back financing for fossil fuel projects.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.