ECB, Regulators Working on Climate Reporting Requirements for Structured Finance Products
The European Central Bank, and Europe’s three primary financial regulatory agencies, the European Supervisory Authorities (ESAs), announced today plans to introduce new climate change-related disclosure requirements for structured finance products, aimed at enabling investors to better identify climate-related risks.
Structured finance products typically include investment products in which returns are linked to underlying assets, created through a securitization process. Assets involved in securitization transactions often include real estate mortgages or auto loans, which the ECB and ESAs said could be directly exposed to physical or transition-related climate risks.
The move to enhanced climate-related disclosure for structured products forms part of the regulators’ and the central bank’s efforts to enhance transparency and disclosure more broadly for financial institutions and financial products. The ESAs, which include The European Banking Authority (EBA), The European Insurance and Occupational Pensions Authority (EIOPA), and The European Securities and Markets Authority (ESMA), have been developing advice and standards under the EU Taxonomy and SFDR regulations, while the ECB has been incorporating climate change considerations into its monetary policy framework, and recently published a series of new statistical indicators aimed at helping to analyze climate-related risks in the financial sector.
In a joint statement announcing the development of the enhanced disclosure standards, the organizations said:
“The European Supervisory Authorities (ESAs) and the ECB are committed to contributing to the transition towards a more sustainable economy within their respective mandates. As investment in financial products meeting high environmentalEnvironmental criteria consider how a company performs as a steward of nature., socialSocial criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. and governanceGovernance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights. (ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments.) standards is increasingly important in the European Union (EU), it has also become a priority for structured finance products to disclose climate-related information on the underlying assets.”
The organizations also noted that in addition to posing problems in assessing and addressing climate-related risks, the lack of climate-related data on the assets underlying structured finance products impedes the classification of the products under the EU Taxonomy and SFDR Regulation.
The statement said that ESMA, with contributions from the other ESAs and the ECB, is now working on enhancing the disclosure standards for securitized assets with climate change-related information. The ECB and ESAs also called on originators to collect data needed by investors to assess the climate related risks of the products’ underlying assets, even in the current absence of mandatory disclosure requirements.
The statement added:
“Consistent and harmonised requirements for these instruments are necessary for properly assessing and addressing climate-related risks and would ensure a level playing field across similar asset classes, foster comparability for investors and facilitate equal treatment by EU supervisors. The ESAs and the ECB are committed to supporting the comparability of future disclosure requirements within their respective mandates.”
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