The European Banking Authority published a report assessing the availability and accessibility of data used to identify and qualify environmental, social and governance (ESG) risks, and the feasibility of introducing a standardised methodology for identifying and qualifying credit exposures to such risks. It finds that data availability and accessibility have improved in recent years, but the ESG data landscape remains incomplete and there is still insufficient understanding and evidence of ESG risks’ effective impact on credit risk parameters. Credit institutions are increasingly assessing ESG risks, but progress varies across exposure classes and is constrained by data availability, quality and granularity. Methodologies are most mature for transition risk in corporate portfolios, where some standardisation has emerged around sector classifications, greenhouse gas emissions and counterparties’ transition plans, and for mortgage exposures, which are typically assessed using the location and energy efficiency of the property collateral. For other exposure classes, and for environmental risks beyond climate as well as social and governance risks, practices remain at an early stage and are mostly qualitative; only a few institutions apply specific methods to measure credit risk linked to ESG factors, mainly climate risk, while governance assessments show little standardisation and often rely on expert judgement. Looking ahead, the report highlights the Corporate Sustainability Reporting Directive and European Sustainability Reporting Standards, along with greater transparency in ESG score methodologies and External Credit Assessment Institutions’ credit risk ratings, as expected to improve the data landscape and mitigate current challenges; if regulatory standardisation is pursued, it would most likely need a sequenced approach.
European Banking Authority 2025-02-24
European Banking Authority report finds ESG risk data improving but gaps persist and standardised methodology feasibility varies by exposure and risk type
The European Banking Authority's report notes improvements in ESG data availability but highlights incomplete understanding of ESG risks' impact on credit risk. Credit institutions show varied progress, with methodologies most developed for transition risk. The Corporate Sustainability Reporting Directive and European Sustainability Reporting Standards are expected to enhance data transparency and address challenges, suggesting a sequenced approach to regulatory standardisation.