Joint letter to Commissioner McGuiness on the EFRAG consultation regarding its first set of draft ESRSs

Sustainable Finance

October 5, 2022

On 27 September, the ESBG, together with the European Banking Federation (EBF), the European Association of Co-operative Banks (EACB), Insurance Europe, Accountancy Europe, Business Europe and European Issuers, has submitted a joint industry letter to Commissioner Mairead McGuinness regarding the European Financial Reporting Advisory Group (EFRAG) public consultation on its first set of draft European Sustainability Reporting Standards (ESRS).

In the letter, ESBG strongly emphasized the necessity to phase-in the submission of the disclosure requirements from EFRAG to the Commission. In this respect, it is considered that EFRAG should deliver a limited set of crucial ESRS by November 2022. After this, EFRAG and the Commission should agree on a detailed plan to deliver the rest of the first set of standards and all the other deliverables required by the Corporate Sustainability Reporting Directive (CSRD). All these will constitute the minimum requirements to be delivered within the pre-set deadlines by the Commission.

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ESBG response to the EFRAG consultation on its first set of draft ESRSs calls to ensure levelled global playing field

ESBG submitted its response to the European Financial Reporting Advisory Group (EFRAG) public consultation on the first set of Draft EU Sustainability Reporting Standards (ESRSs) on 4 August. The consultation comes in response the European Commission’s proposal for a Corporate Sustainability Reporting Directive (CSRD) which envisages the adoption of EU Sustainability Reporting Standards (ESRSs). As part of this, the Commission mandated EFRAG to provide technical advice in the form of draft sustainability reporting standards.

In its response, ESBG highlighted the need for consistency between the International Sustainability Standards (ISSB) sustainability disclosures and the EFRAG ESRSs in order to ensure a levelled global playing field. Moreover, ESBG emphasises the lack of proportionality with respect to disclosure requirements, specifically for smaller/unlisted companies and proposes the provision of certain reporting requirements being made optional.

With respect to implementation challenges, ESBG considers that the data availability issue is the most critical challenge for financial institutions. Taking into consideration the above, ESBG proposed two phase-in solutions that are mutually complementary: i) first year reporting on own operations and gradual reporting on information from the value chain and ii) prioritisation of climate topics and gradual consideration of other environmental, social and governance topics.

Furthermore, we believe that there is not enough guidance in the exposure drafts with respect to the application of the double materiality principle (the requirements for companies to disclose not only the risks that affect, but also their impacts on society and on the environment). In this sense, this concept needs to be clarified and more guidance is needed in relation to specific sectors in due time.

ESBG stresses the limitation on disclosing value chain information for companies. We consider it is difficult to obtain information from companies that are not under the control of the institution (e.g. associate companies). We propose that a phase-in period of 2 years must be granted to financial undertakings to allow them to adapt their processes to collect the necessary information from their value chain.

As a next step, ESBG will evaluate if there is interest from members in submitting input into the up-coming EFRAG consultations on SME specific standards as well as on sector specific standards (EFRAG consultations are expected to be published in 2023).

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EU Taxonomy minimum safeguards: Criteria for the application of external checks should be further defined

ESBG submitted its final response to the Platform for Sustainable Finance (PSF) consultation on its draft report on minimum safeguards (MS) on 6 September. In its response, ESBG highlights that assessing whether a company complies with the due diligence processes should, other than relying on external checks as only possibility, be demonstrated by: i) proving that the applicable national legislation provides for sufficient guarantees concerning the specific topic; ii) self-declarations made by the client concerning the specific topic.

ESBG submitted its final response to the Platform for Sustainable Finance (PSF) consultation on its draft report on minimum safeguards (MS) on 6 September.

The report is intended to provide advice on the application of the minimum safeguards which bring a social and governance component to the EU Taxonomy. The report looks at human rights including workers’ rights and consumers´ rights, bribery/corruption, taxation and fair competition as core substantive topics for which compliance with minimum safeguards has to be defined. The draft report proposes a two-pronged approach for identifying non-compliance with MS, namely one related to adequate due diligence processes implemented in companies (internal checks) and the other related to the actual outcome of these processes or the company’s performance (external checks).

In its response, ESBG highlights that assessing whether a company complies with the due diligence processes should, other than relying on external checks as only possibility, be demonstrated by: i) proving that the applicable national legislation provides for sufficient guarantees concerning the specific topic; ii) self-declarations made by the client concerning the specific topic.

Moreover, ESBG emphasises that gravity thresholds for non-compliance should be defined, so that not every minor violation (e.g. of taxation or work laws) leads to the establishment of an external check.

Furthermore, when assessing compliance with MS, the report recommends that the focus should be on assessing the human rights due diligence processes of a company, rather than on controversy checks e.g. media coverage (currently employed by ESG ratings agencies), as it is considered that the latter is based on value judgement and is sometimes difficult to justify. ESBG believes that the administrative cost derived from direct analysis of due diligence processes would be too burdensome for institutions and emphasizes that they should rely on ESG ratings agencies in order to not impair financial activity.

Finally, ESBG calls for further clarifications on the level of application of MS in particular cases, e.g. an exposure to a company active in sectors that by definition do not fulfil the minimum safeguards to be taxonomy-eligible or -aligned, even if the specific transaction finances activities that fulfil all requirements.

As a next step, the Platform will analyse the feedback received and prepare the final report. ESBG will continue to monitor this very important topic, with the possibility to get involved at a later stage.

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International Sustainability Standards Board consultation on Sustainability Disclosures

The International Sustainability Standards Board (ISSB) has been established at COP26 with the purpose of developing a comprehensive global baseline of sustainability disclosures for the capital markets. The purpose of the consultation is to develop a comprehensive global baseline of sustainability disclosures designed to meet the information needs of investors in assessing enterprise value.

To this end, the consultation includes proposed standards on general sustainability-related disclosure requirements as well as on climate-related disclosure requirements |Position – Executive summary | August 2022 |

CONSISTENCY BETWEEN ISSB STANDARDS AND EFRAG ESRSs
WSBI-ESBG believe that it is crucial to achieve consistency of sustainability reporting at global level and especially a full alignment of reporting requirements between ISSB standards and EFRAG European Sustainability Reporting Standards (ESRSs) to ensure a global playing field in terms of sustainability reporting. This convergence between both standards will address the risk of additional disclosures.

DOUBLE MATERIALITY
WSBI-ESBG highlight that the IFRS sustainability standards are based on an ‘enterprise value creation’ or financial materiality approach, in which sustainability impacts are measured in terms of impacts on the financial position and prospects of the company itself. On the other hand, the EFRAG ESRSs are being developed based on the ‘double materiality’ principle, where disclosure is required both from the point of view of financial impact on the company and on the impact of the company on society and the environment.

TRANSITION PLANS
WSBI-ESBG notes that the EFRAG ESRSs make a clearer reference to alignment with limiting global warming to 1.5°C in line with the Paris Agreement. On the other hand, IFRS sustainability standards allow the entity to choose its own target. By way of consequence, WSBI – ESBG requests that the ISSB takes into consideration including a clear reference to the 1.5°C target of the Paris Agreement in order to ensure comparability between the two standards.

BOUNDARIES AND VALUE CHAIN
Although, WSBI – ESBG considers it essential that sustainability reporting should capture the entire value chain, we ask for clearer and more defined boundaries as it is considered difficult and complicated to obtain information from companies that are not under the control of a financial institution, especially regarding scope 3 GHG emissions.

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World savings and retail banks call for harmonised taxonomies on sustainable finance

WSBI Chairman, Isidro Fainé, says banks face the future with hope and optimism, despite the short-term turbulent context.

 

Read the full WSBI Paris Declaration

Paris, 8 July 2022 – The World Savings and Retail Banking Institute (WSBI), a global network representing over 7,000 savings and retail banks, called today on policymakers for the harmonisation of taxonomies on sustainable finance. This as a necessary step for banks to play an effective cross-regional role providing the investment needed to achieve the ambitions of the 2015 Paris Agreement.

At the end of the WSBI World Congress, the association’s members approved the Paris Declaration which detailed the call to policy makers to develop a set of principles for designing taxonomies that are centred on pragmatic and science-based targets.

“As WSBI members are present in remote areas, close to the people, and focus on SMEs and private households, they are aware of the necessity of having ambitious, yet pragmatic, progressive and proportional, targets”, states the document.

The Declaration called for taxonomy design principles that encourage interoperability and mutual recognition to promote cross-border sustainable finance and to reduce compliance costs. It points out the need for a common language to ease comparability while preventing duplication of efforts and points to the EU-China Common Ground Taxonomy (CGT) as a promising first step in the right direction.

The WSBI Chairman, Isidro Fainé, closed the World Congress with a message of optimism despite the short-term turbulent context the world is living.

“The WSBI community of banks is facing the future with hope and optimism. An optimism that translates into specific actions for social progress. This is evidenced by our impeccable track record in the way we do banking, where financial inclusion is our flag and with our philanthropic actions, where our priority is to help those most in need through a wide range of social and educational programmes”, said Isidro Fainé.

The Chairman also emphasised that “the determination of our community to contribute to a better world, as our DNA dictates. Our WSBI members on five continents believe that a better world is possible”.

Founded in 1924, the WSBI members share a business model that has social responsibility at its core and is focused on serving local communities, households and SMEs. WSBI has 65 members in 88 countries. They serve over 1.7 billion customers, have total assets of over 15 trillion dollars, and employ 2.2 million workers.

The 26th World Congress was held in Paris on 7-8 July.

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World savings and retail banks moving forward on sustainability

World Savings and Retail Banking Institute (WSBI)'s members get together for the first time since 2018 at the 26th World Congress, in Paris.

Paris, 7 July 2022 – The World Savings and Retail Banking Institute (WSBI), representing over 7,000 organisations globally and serving some 1.7 billion customers, held today its 26th Congress ‘Regionally rooted, globally responsible’ with focus on how to move forward with financial sustainability in the current challenging times.

“Feeling and acting socially responsible is inextricably linked to our identity. The fact is we were born that way, it forms part of our DNA, and it is our vocation. All of this translates into our way of doing banking that is fundamentally different from other players in the sector, and furthermore, it is profitable, efficient and fair”, said WSBI President, Isidro Faine, as he addressed over 200 participants from 4 continents who gathered today in Paris for the first time since 2018.

Sustainability was the key topic at the centre of the discussions and panels, as savings and retails banks seek the most effective ways to move forward on the topic and contribute to address the pressing environmental needs.

The internationally renowned mountaineer and activist, Reinhold Messner, presented his vision for a sustainable future.

Sustainable financial regulation, the role of the physical branch in the digital era, and the most recent geopolitical shifts were some of the topics covered today.

“This kind of crisis moments are the time that we have to realise our power and to fulfil our duty to the fullest by contemplating on what we can deliver in the face of these challenges,” said WSBI Managing Director, Peter Simon, at the end of the first day of this event.

The 26th World Congress is held in Paris on 7-8 July.

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ESBG calls for more feasible rules on the new corporate sustainability due diligence

In its response to the European Commission (EC)’s call for feedback on the proposal for a Directive on Corporate Sustainability Due Diligence, the ESBG suggests several changes to make the rules more feasible.

ESBG members support the goal to tackle environmental issues and human rights abuses as they commit to sustainable, responsible and future-oriented banking and support the creation of a coherent legal framework. Nevertheless, ESBG finds that the proposal foresees a role for financial entities that is too ambitious and could create legal uncertainty.

To avoid unfeasible implementation and monitoring costs, accompanied by uncertain legal consequences, we request further clarification on the role of financial entities in the context of the proposed Directive.Rules must be proportionate, feasible and should not restrict competition and innovation. The current environment might not be adequate for requirements that could hamper economic and financial recovery.

The ESBG feedback calls to limit the scope to companies with less than 1000 employees, and for a voluntary common due diligence framework of best practices for regulated financial undertakings that takes into account a specific connection to the provision of services by banks. It also calls for the introduction of a grandfathering provision for the identification of actual and potential adverse impacts and the creation of a uniform standard for the preparation of a Code of Conduct.

ESBG members underline that there is no need to establish new corporate directors’ duties and that existing liability regimes already provide appropriate rules. In consideration of the right to the presumption of innocence, businesses should not be held for damage in their supply chain if they did not directly cause it.

Additionally, several terms need to be further clarified and disproportionate provisions should be eliminated.

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ESBG response to ESMA’s consultation on guidelines of MiFID II suitability requirements

On 27 April 2022, ESBG submitted its response to the European Securities and Markets Authority’s (ESMA) consultation on guidelines on certain aspects of the MiFID II suitability requirements. Published in January 2022, the paper builds on the text of the 2018 ESMA guidelines, which are now being reviewed following the adoption by the European Commission of the changes to the MiFID II Delegated Regulation to integrate sustainability factors, risk and preferences into certain organisational requirements and operating conditions for investment firms.​

In our response, we stressed that ESMA should give investment firms more flexibility in implementing the new rules. In particular, we consider that the process for collecting client information is too detailed and impractical for both the client and the investment firm, hence we proposed that it should be optional. We also noted that the two-step approach of the suitability assessment is overly restrictive and time-consuming. For these reasons, we urged that the firm be permitted to collect all information from the customer at once.

Moreover, we understand that Level 2 Regulation allows an investment firm to recommend a product that doesn’t meet the client’s sustainability preferences, if the issue is explicitly stated and explained to the client as well as documented in the suitability report. This practice is contrary to the guidelines which require the client to first adapt his or her sustainability preferences before any further discussion. Additionally, we recommended that collecting extensive client’s information should not always be necessary when, for example, an investment firm does not have any financial instruments included in its product range that would meet the client’s sustainability preferences.

Lastly, we proposed an alternative treatment of investment advice with a portfolio approach in terms of collecting client information on sustainability preferences. We believe it would be more beneficial for the client if firms were allowed to collect such information in each advice session rather than for the entire portfolio as in the case of providing portfolio management.​

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Strengthening the quality of corporate reporting and its enforcement in the EU

The EU corporate reporting framework has been developed with the purpose of ensuring that companies publish the right quantity and quality of relevant information with the ultimate purpose of allowing investors and other interested stakeholders to assess companies’ performance and governance and to take decisions based on that.

The consultation aims to evaluate the impact of the EU framework on the three pillars of high quality and reliable corporate reporting: corporate governance, statutory audit and supervision. This position paper is based on ESBG’s response to the consultation.
The European Commission adopted its proposal for a EUGBS in July 2021 and later launched a public consultation. In this context, ESBG has recently finalised a position paper that indicated some of the main concerns with the adopted proposal.

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European Commission Banking Package proposal

On February 22, ESBG responded to the European Commission “have your say" consultation on the Banking Package proposal, which transposes the final elements of the Basel III reforms in the EU regulatory framework and pursues other prudential and supervisory objectives.

ESBG supports the application of the output floor at the highest level of consolidation. The envisaged single-stack approach however requires that supervisory powers are more clearly framed and that the arrangements mitigating its impact are of a longer-term nature or permanent. The transitional arrangements for residential real estate, unrated corporates and derivatives should be made permanent or at least phased out based on the actual observation of structural changes in the EU banking market. Moreover, these flexibilizations should be extended also to institutions using the standardised approach to maintain a level playing field.

We recognise the proposal to disregard historical operational losses for all institutions within the calculation of capital requirements for operational risk, meaning that the internal loss multiplier (ILM) is effectively being set equal to one. This is a discretion provided in the Basel framework.

As regard to equity exposures, we support the implementation of a new category with a lower 100% risk weight (RW) for long term strategic equity investments.

Regarding specialised lending, we support the proposal to increase the risk sensitivity for unrated object finance exposures.

With respect to real estate exposures, the proposed requirements for non-income producing real estate should not go beyond the Basel standards. We then support the increased risk sensitivity for acquisition, development and construction (ADC) lending.

The threshold to use the simplified credit valuation adjustment (CVA) method should be aligned with the provision in the Basel framework.

We warn against an excessively restrictive application of the credit conversion factor (CCF) to trade finance instruments and to other exposures.

The proposed centralization of the disclosures is appreciated. Small and non-complex institutions should be exempted from reporting and disclosing requirements in the area of Environmental, Social and Governance (ESG). Further proportionality elements could then be envisaged.

Furthermore, the decision to retain important EU features such as the SME and the Infrastructure supporting factors and the CVA exemptions is appreciated.

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