EBA Sustainable Lending Guidelines

From Open Risk Manual

This entry is a compilation of all the elements in the EBA Guidelines on Loan Origination and Monitoring[1] that are directly relevant for the implementation of Sustainable Finance principles, in particular Environmentally Sustainable Lending

Embedding Area Sub-Area Guidance
Governance Credit Risk Culture The Credit Risk Culture should include an adequate tone from the top and ensure that credit is granted to borrowers considering the impact on sustainability, and related environmental, social and governance (ESG) factors.
Credit Risk Appetite Institutions should incorporate ESG factors and associated risks in their Credit Risk Appetite and risk management policies, credit risk policies and procedures, adopting a holistic approach.
Environmentally Sustainable Lending Institutions that originate or plan to originate environmentally sustainable credit facilities should develop, as part of their credit risk policies and procedures, specific details of their Environmentally Sustainable Lending policies and procedures, covering the granting and monitoring of such credit facilities
Origination Credit Risk Analysis - SME's In the context of SME Credit Risk Analysis institutions should assess the borrower’s exposure to ESG factors, in particular environmental factors and the impact on climate change, and the appropriateness of the mitigating strategies, as set out by the borrower. This analysis should be performed on a borrower basis; however, when relevant, institutions may also consider performing this analysis on a portfolio basis.


In order to identify borrowers that are exposed, directly or indirectly, to increased risk associated with ESG factors, institutions should consider using heat maps that highlight, for example, climate-related and environmental risks of individual economic (sub-)sectors in a chart or on a scaling system. For loans or borrowers associated with a higher ESG risk, a more intensive analysis of the actual Business Model of the borrower is required, including a review of current and projected greenhouse gas emissions, the market environment, supervisory ESG requirements for the companies under consideration and the likely impacts of ESG regulation on the borrower’s financial position.

Credit Risk Analysis - Corporates In the context of Corporate Credit Risk Analysis institutions should assess the borrower’s exposure to ESG factors, in particular environmental factors and the impact on climate change, and the appropriateness of the mitigating strategies, as set out by the borrower.


In order to identify borrowers that are exposed, directly or indirectly, to increased risks associated with ESG factors, institutions should consider using heat maps that highlight, for example, climate-related and environmental risks of individual economic (sub-)sectors in a chart or on a scaling system. For loans or borrowers associated with a higher ESG risk, a more intensive analysis of the actual business model of the borrower is required, including a review of current and projected greenhouse gas emissions, the market environment, supervisory ESG requirements for the companies under consideration and the likely impacts of ESG regulation on the borrower’s financial position.

Credit Decisions The Credit Decision should be clear and well documented and include all the conditions and pre-conditions, including those to mitigate the risks identified in the creditworthiness assessment, such as risks associated with ESG factors, for the loan agreement and disbursement.
Collateral Valuation (at Point of Origination) When applicable, institutions should take into account ESG factors affecting the value of the collateral, for example the energy efficiency of buildings.

References

  1. EBA, Guidelines on loan origination and monitoring EBA/GL/2020/06

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