Skip to content
  • MyNewMarkets.com
  • Claims Journal
  • Insurance Journal TV
  • Academy of Insurance
  • Carrier Management
Insurance Journal - Property Casualty Industry News

Featured Stories

  • ‘Scattered Spider’ Hacks Are Targeting Aviation Sector
  • Paper Company Agrees to $300K PFAS Settlement
  • Articles
  • Jobs
  • Markets

Current Magazine

current magazine
  • Read Online
  • Subscribe
  • Login
  • Front Page
    • National
    • International
    • Most Popular
    • Magazine
    • Forums
    • Blogs
    • Videos/Podcasts
    • Newsletters
  • News
    • Most Popular
    • National
    • International
    • East
    • Midwest
    • South Central
    • Southeast
    • West
  • Magazines
  • Research
  • Directories
  • Jobs
  • Features
    • Events
    • Forums
    • Market Directories
    • Quotes
    • Polls
    • Rankings & Awards
    • Insurance Giving Back
  • Subscribe

Banks in EU Get World’s First ESG-Related Rewrite of Capital Rules

By Frances Schwartzkopff | October 13, 2023
Email This Subscribe to Newsletter
  • Article

In a global first, Europe’s main bank regulator is revising the framework that sets capital requirements so that lenders reflect environmental and social risks in mandatory, industrywide buffers.

The European Banking Authority has identified “some short-term fixes” to minimum requirements — known as Pillar 1 — “that can already be implemented,” Chairman Jose Manuel Campa said in an interview. Others will be phased in over time, with some requiring new legislation, the EBA said.

The new requirements, outlined in a report published by the EBA on Thursday, mark the first in what’s set to be a continuous reworking of the capital framework within which European banks must operate. The goal is to reflect the increasing threat to financial stability that regulators now see from ESG factors such as climate change and inequality.

ESG is “changing the risk profile for the banking sector,” according to the EBA. The development is expected to become more pronounced over time and has implications for “traditional categories of financial risks, such as credit, market and operational risks,” it said.

Until now, regulatory focus has largely been on disclosure and individual bank risk (known as Pillar 2), due in large part to a lack of adequate data and methodologies for calculating sector-wide ESG risks.

The bank industry, meanwhile, has been emphatic in its opposition to such far-reaching capital requirements.

In response to an EBA consultation last year, the European Banking Federation said it’s against using Pillar 1 to address climate risks, arguing that capital assessments should allow for differences in bank balance sheets. Predicting losses also means relying on scenarios which are uncertain and shouldn’t be used to set capital levels, the industry group said.

The EU’s largest bank, BNP Paribas SA, warned separately that increasing capital requirements would hamper lenders’ ability to provide transition finance, without necessarily making the industry any more resilient.

Banks With Sector Emission Targets

Meanwhile, the EBA has rejected an industry call for lower capital requirements to encourage lending to companies that invest in technologies to address climate change, or penalties for exposures to heavy polluters. Such a factor could mask risks, leaving banks without the necessary buffers and compromising “the reliability of capital requirements as indicators of risk,” the authority said.

Campa said the new ESG requirements are “very concrete.” But they won’t have the same impact on capital ratios as the so-called Basel III rules that followed the financial crisis of 2008, he said.

For now, the new ESG buffer rules aren’t “going to lead to a significant, discrete increase in the short term,” Campa said.

That’s in part because models for estimating the fallout of climate change, environmental degradation and inequality are in their infancy, compared with conventional risk management tools that have been built on historical data.

“There are a lot of areas that we need to understand better,” Campa said. “One thing that is interesting that we capture in this report — and it’s important for people to realize — is that as you think about regulation, we need to think differently about the methods that we have to assess this risk.”

The EBA report contains more than five pages of instructions to banks and national supervisors for short and longer-term changes. That includes plans for future regulatory action, which the EBA says may require new legislation. Banks and national regulators will be expected to:

  • Reevaluate collateral values to incorporate both physical and transition risks, and continue monitoring these values over the life of the exposure.
  • Incorporate environmental risks into trading book risk budgets, internal trading limits and the creation of new products.
  • Ensure external credit assessments integrate environmental and social factors as “drivers of credit risk.”
  • Adapt internal models for calculating risks from specific exposures to incorporate environmental and social factors and limit use of so-called overrides.
  • Adjust probabilities of default and loss given defaults.

The EBA said it will continue work on a number of issues, including recommendations for banks with high degrees of exposure to particularly vulnerable industries including fossil fuel and real estate.

Global banking and financial stability organizations are all reviewing reporting and capital frameworks, though none has moved as fast as the EU in setting firm requirements. The Basel Committee on Banking Supervision expects to publish a proposed framework for reporting climate-related financial risks by the end of the year.

Banks are highly likely to face bigger losses as the economy moves toward net zero emissions, though how big will depend on policies adopted to address climate change, according to a September report by the European Central Bank. Credit risk would more than double by 2030 in a so-called late push scenario compared with an increase of 60% in an accelerated transition, the ECB said.

Meanwhile, a growing number of bank customers is losing insurance due to the climate risk they face, adding to the potential losses that may hit banks. A survey published on Thursday by the European Investment Bank revealed that the physical damage caused by climate change threatens two-thirds of EU companies, yet only 13% have insurance to offset losses.

The changes the EBA is making are part of a larger reconfiguration of banks’ capital framework, which includes more extensive disclosure requirements around ESG. It’s the latest demonstration of the EU’s willingness to take a global lead in responding to the risks posed by climate change.

Campa said banks and regulators need to adjust their approach.

“We need to be forward-looking and we need to accept that we have to be forward looking. So we need to be willing to work more with scenarios,” Campa said. “Climate is likely to increase the correlations among those risks that before you thought were diversified. Some you thought were not correlated, they’re going to be very correlated.”

Photograph: The La Defense business district of Paris. Photo credit: Nathan Laine/Bloomberg

Related:

  • EU Prepares for Climate Stress Test That Includes Insurers
Copyright 2025 Bloomberg.

Topics Europe

Was this article valuable?

Thank you! Please tell us what we can do to improve this article.

Thank you! % of people found this article valuable. Please tell us what you liked about it.

Here are more articles you may enjoy.

Two More Insurers Enter Florida Market as Hurricane Season Warms Up
College Team Physicians Wary of Greater Liability Risk With Athletes Making Money
‘Abolishing FEMA’ Memo Outlines Ways for Trump to Scrap Agency
Father, Two Sons Charged With Defrauding North Carolina Insurer of Last Resort

Written By Frances Schwartzkopff

More From Author

The most important insurance news,
in your inbox every business day.

Get the insurance industry's trusted newsletter

Email This Subscribe to Newsletter
  • Categories: International & Reinsurance NewsTopics: Climate Change, environmental social and governance (ESG) criteria, EU climate change, European Banking Authority (EBA), global warming
  • Have a hot lead? Email us at newsdesk@insurancejournal.com
More News
Senate Debates Whether to Adopt Revised State AI Regulation Ban
US Warns Iran-Tied Hackers Pose Ongoing Risk to American Firms
2024 Grocery Chain Cyberattack Exposed Data of 2.2 Million Employees, Others
Lloyd’s Applauds Removal of Section 899 Tax Measure From ‘One Big Beautiful Bill’
More News Features

Read This Next

  • Banks in EU Get World's First ESG-Related Rewrite of Capital Rules
  • Louisiana Governor Vetoes Bill Limiting Bad Faith Lawsuits Against Insurers
  • Weeks Later, Erie and Philadelphia Insurance Still Working to Restore Networks
  • Krispy Kreme Starts Notifying Over 160,000 People Affected by Data Breach
  • Slide's Exec Pay Leads to Questions About Florida Citizens' Rate Model

Insurance Jobs

  • Commercial Multi-Line Senior Underwriter - Philadelphia
  • Licensed Insurance Sales Agent - Remote
  • Controller - NYC Area
  • Personal Lines Account Manager – Insurance – REMOTE - Remote
  • Commercial Lines Account Manager – Insurance – REMOTE - Remote
MyNewMarkets
  • Is It Covered: Auto Coverage Under a CGL Policy
  • When Harassment Follows You Home: Managing EPL Risk in a Remote Work Era
  • Trouble Brewing? 6 New Risks for Winery and Brewery Clients
  • Risk Management Considerations When Having Family Fun
  • Lights, Camera, Action: New Risks Emerge as Hollywood Goes Virtual, Hunts Tax Credits
Claims Journal
  • US Warns Iran-Tied Hackers Pose Ongoing Risk to American Firms
  • Hancock Claims Consultants Expands Field Coverage with Acquisition of Knight's Solutions
  • Supreme Court Will Review Billion-Dollar Cox Communications Copyright Case
  • Hedge Fund Strategy Built on Catastrophes Taps Hot New Trend
  • GM Wins Victory as Appeals Court Decertifies Transmission Lawsuits
Academy of Insurance education
  • June 17 How to Write: Landlords
  • June 19 Can You Hear Me? Yes, I Am Listening!

Insurance News

  • News by Region
  • News by Topic
  • Yesterday

Site Search

Features

  • Insurance Markets Directory
  • Forums
  • A.M. Best Company Ratings
  • Industry Events
  • Agencies For Sale
  • Newswire
  • Insurance Jobs
  • Rankings & Awards

Connect with us

  • Email Newsletters
  • Magazine Subscriptions
  • For Your Website
  • RSS Feeds
  • Twitter
  • Facebook
  • LinkedIn
  • Do Not Sell My Info

Insurance Journal

  • Submit News
  • Advertise
  • Subscribe
  • Reprints
  • Link to Us
  • Contact Us

Wells Media Group Network

  • Insurance Journal
  • MyNewMarkets.com
  • Claims Journal
  • Insurance Journal TV
  • Academy of Insurance
  • Carrier Management
© 2025 by Wells Media Group, Inc. Privacy Policy | Terms & Conditions | Site Map