National Bank of Romania makes ESG considerations part of loan origination process

On 1 April 2022, Regulation of the National Bank of Romania no. 5/2022 (Regulation 5/2022) partially went into force, amending and supplementing NBR Regulation no. 5/2013 on capital requirements for credit institutions and repealing certain pieces of legislation, inter alia, incorporating into the national legislation the Guidelines issued by the European Banking Authority (EBA) on loan origination and monitoring.

One of the topics addressed by Regulation 5/2022 is incorporating into national legislation EBA recommendations for credit institutions to consider environmental, social and governance (ESG) in the lending process.

Starting on 1 April 2022, credit institutions are required to:

• put in place an adequate strategy for credit-risk analysis to include ESG factors;
• include in their policies and procedures ESG factors and related risks (e.g. the physical risk of climate change over the financial performance of the borrower, the transition risk that a transition to a low carbon economy might have over the borrower, market changes, etc.)

Regarding credit institutions that intend to carry out environmentally sustainable lending, Regulation 5/2022 is consistent with EBA Guidelines in introducing an obligation for these credit institutions to include in their credit-risk policies and procedures specific details to cover the origination and monitoring of environmentally sustainable lending. Although Regulation 5/2022 does not give examples, nor does it define in any way what constitutes environmentally sustainable lending, the Green Loan Principles published by the Loan Market Association, the related guide, and the EU Taxonomy[1] could likely serve as a starting point in drawing up the specific details required under Regulation 5/2022.

Importantly, Regulation 5/2022 does not provide definitions of “ESG factors”, “ESG risks”, “environmentally sustainable lending”, etc., whereas at the EU level these terms are constantly evolving together within the economy and society. At the EU level, there are several pieces of legislations, guidelines and reports issued by the competent authorities proposing definitions for ESG-related topics that may be considered by credit institutions when drafting risk strategies and internal policies and procedures (e.g. the EBA Report on management and supervision of ESG risks for credit institutions and investment firms[2]).

Note that breaching any of the provisions of Regulation no. 5/2013 (as amended by the Regulation 5/2022) may trigger sanctions provided under Emergency Government Ordinance no. 99/2006 on credit institution and capital adequacy, as further amended and supplemented.

For more information on Regulation 5/2022 and how they could affect your business, contact your regular CMS advisor or local CMS experts: Ana Radnev and Diana Rotaru.

[1] Regulation (EU) 2020/852 (Taxonomy) on the establishment of a framework to facilitate sustainable investment

[2] EBA/REP/2021/18