Regulatory response

ORX response to EBA environmental risks consultation

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Regulatory Response - August 2022

ORX has surveyed its members and produced a consolidated response to the EBA consultation on environmental risks.

Climate continues to be a priority for banking regulators. In May, the European Banking Authority (EBA) published a discussion paper on the Role of environmental risks in the prudential framework.

Following a survey of ORX members, our response consolidates the feedback to the EBA consultation. The letter is available for all to download. It focuses on the operational risk questions in the discussion paper only.

Risks stemming from climate change and broader environmental issues are changing the risk landscape for the financial sector and will become even more prominent going forward. This raises the question as to whether the prudential framework can sufficiently account for these new risk drivers.

Our paper, Climate & Operational Risk: The ORX approach provides an approach to using climate flags to identify losses relating to climate or environmental risks. The paper supports our members by providing examples of how to use flags with existing Basel event types and with the ORX Reference Taxonomy.

This discussion paper (DP) initiates the discussion on the appropriateness of the current prudential framework to address environmental risk drivers. It also considers the potential justification for a dedicated prudential treatment of exposures substantially associated with environmental and/or social objectives, and those subject to environmental and/or social impacts.

This DP provides an initial assessment of how the framework interacts with environmental risks and poses questions on whether adaptations are required to effectively address such risks. The analysis is focused on exposures related to assets and activities associated with environmental objectives/impacts. Those related to social objectives/impacts will be considered in the next steps.

For example, firms are asked to consider the potential integration of a forward-looking perspective into the operational risk framework to take into account the increasing frequency and severity of physical environmental events, such as flooding. 

ORX response to EBA consultation on environmental risks in the prudential framework

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