ESG factors to be considered in the credit process - EBA guidelines

Romania

The EBA has announced that the Guidelines will apply from 30 June 2021, with certain specific sections of the Guidelines to be applied at a later stage. When scheduling the deadlines, the EBA took into consideration the challenges that credit institutions are currently facing during the COVID-19 crisis.

Primarily, the Guidelines were drafted further to the 2017 European Council Action Plan to tackle non-performing loans in Europe, but they cover a broad spectrum of lending-related topics setting-out requirements for the loan process, including consumer finance (valuation of assets, assessing the creditworthiness, etc.), technology, introducing sustainability factors as part of the the lending process.

Within the Guidelines, “sustainable finance” refers to "any financial instrument or investment, including equity, debt, guarantee or a risk management tool, issued in exchange for the delivery of financing activities that meeting criteria for being environmentally sustainable".

Importantly, the EBA encourages credit institutions to consider environmental, social and governance (ESG) factors and other related risks in their risk-management policies and procedures. To assist credit institutions in this matter, the Guidelines include a general classification of these risks: physical risks (e.g. climate change-related risks) and transition risks (i.e. the transition to a low-carbon economy).

Specifically, for credit institutions which intend to carry out environmental lending, the Guidelines include a series of recommendations on internal procedures and policies and those aspects that should be specifically considered when financing a sustainable project, such as:

  • a list of projects, activities and criteria that qualify as sustainable: although this has proven difficult in practice, leading to the so-called “green-washing” phenomenon, at the EU level there is an on-going process to adopt a sustainable finance taxonomy (adopted by the European Council on 15 April 2020) to assist all relevant actors on sustainable finance (see here);

  • the collection of information on the borrower and its project: this should be done both as a loan-granting procedure and during the lifetime of the loan to monitor the use of the proceeds;

  • to assess the borrower’s capacity to monitor and report the allocation of proceeds.

Although there are still many actions to be taken in regard to sustainable finance, the EBA Guidelines are relevant because they represent a step forward in encouraging credit institutions to issue sustainable loans, and  recognise the environmental factors, which should be taken into account, whereas such ESG factors play an important part in evaluating the credit risk of a borrower.

For more information on the EBA Guidelines and how they could affect your business, contact your regular CMS advisor or local CMS experts Ana Radnev and Diana Rotaru.