81. Institutions should monitor a range of backward- and forward-looking ESG risk metrics and …

Institutions should monitor a range of backward- and forward-looking ESG risk metrics and indicators. Large institutions should monitor at least the following indicators:

• a) Amount and share of exposures to, and income (interest, fee and commission) stem-ming from, business relationships with counterparties operating in sectors that highly contribute to climate change in accordance with Recital 6 of Commission Delegated Regulation (EU) 2020/1818, i.e. the sectors listed in Sections A to H and Section L of Annex I to Regulation (EC) No 1893/2006 .

Institutions should use a sectoral differentiation that is as granular as possible. In par-ticular, the degree of granularity should allow institutions to monitor the amount and share of exposures to, and income stemming from, relationships with specific coun-terparties, such as fossil fuel sector entities and/or companies excluded from EU Paris-aligned benchmarks¹⁷ .

• b) Portfolio alignment metrics showing at a sectoral level the extent to which exposures and production capacities operated by clients are, or are projected to be, (mis-)aligned with a pathway consistent with the applicable climate legal and regula-tory objective, such as reaching net-zero GHG emissions by 2050, based on alignment metrics relevant to the selected sectors and using methods described in Section 4.2.3 b).

Institutions should complement these indicators with information related to the as-sessment of potential financial risk impacts resulting from misalignments.

• c) Financed GHG emissions with a breakdown by scope 1, 2 and 3 emissions in absolute value and, where relevant, intensity relative to units of production or revenues, split by sectors, using a sectoral differentiation that is as granular as possible and at least for selected sectors determined on the basis of the materiality assessment.

Institutions should complement these metrics with qualitative or quantitative infor-mation and criteria supporting the interpretation of their evolution over time, includ-ing e.g. a temporary increase due to the provision of transition finance to GHG-in-tense counterparties, and identifying the underlying drivers of the changes in emis-sions.

17 In accordance with Article 12(1), points (d) to (g), and Article 12(2) of Climate Benchmark Standards Regulation.

Examples of methodologies or databases that may support institutions when compu-ting these metrics include the Global GHG Accounting and Reporting Standard for the Financial Industry, developed by the Partnership for Carbon Accounting Financials, and the Carbon Disclosure Project.

• d) The level of progress achieved in the implementation of key financing strategies de-termined by the institution to ensure its resilience to ESG risks and preparedness for the transition towards a more sustainable economy, e.g. by monitoring financial flows towards financial assets or counterparties that share a common set of characteristics relevant to the institution’s targets or risk appetite in relation to ESG risks.
• e) Client engagement metrics providing information about:
• i. the percentage of counterparties for which an assessment of ESG risks has been performed, also as regards their transition strategies and, where avail-able, transition plans and their consistency with the institution’s objectives , specifying the scope of selected sectors, products and business lines covered by these assessments;
• ii. the results and outcomes of such engagement such as the positive (or any sub-classification within that category) or negative (or any sub-classification within that category) assessments of these counterparties’ adaptability and resilience to the transition to a sustainable economy, the alignment progress against the institution’s targets and objectives, and follow-up actions taken by the institution.
• f) A breakdown of portfolios secured by real estate according to the level of energy ef-ficiency of the collateral.
• g) The ratio of financing of low-carbon energy supply technologies in relation to the fi-nancing of fossil-fuel energy supply technologies.
• h) The ratio of environmentally sustainable exposures financing activities that contrib-ute or enable the environmental objective of climate change mitigation referred to in Article 9 point (a) of Regulation (EU) 2020/852¹⁸ in relation to the GHG-intense expo-sures.
• i) Levels of physical risk the institution is exposed to, and their impact on financial risks, by considering several scenarios and all hazards relevant to the institution’s activity , supplemented with information on the progress achieved in the implementation of risk mitigation measures.

18 Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (OJ L 198, 22/06/2020, p. 13).

• j) Measures of concentration risk related to physical risk drivers (e.g. measurement of exposures and/or collateral in high flood risk, water-stressed or wildfire risk areas) and transition risk drivers (e.g. exposures to sectors with elevated transition risks), by using a sufficiently granular geographical split of exposures.
• k) Amount of historical losses related to ESG risks and, based on scenario-types meth-ods, forward-looking estimate(s) of exposures-at-risk and potential future financial losses related to ESG risks.
• l) A measure of ESG-related reputational risk tracking how regulation, communication, commitments or public controversies regarding current and future business-related activities impact directly or indirectly the institution, by considering interactions with operational risk and strategic and business model risks, such as loss of business opportunities or strategic partnerships.
• m) Any ESG-related litigation claims in which the institution has been, is or may become involved in, based on available information.
• n) The status of ESG risk-related capacity building, such as the percentage of staff who have received specific training.
• o) Metrics related to non-climate related factors such as portfolio-level dependencies and impacts on ecosystem services, or exposures to counterparties with material de-pendencies or negative impacts on biodiversity, taking into account both sectoral and geographical location information.
• p) Progress against all of the institution’s targets set in relation to ESG risks and ESG objectives, including as part of the institution’s plan as referred to in Section 6 or as part of other sustainability commitments made by the institution.

1. Overview

1.1 References

1.2 Identified Requirements

1.3 Related Standards

2. Identified Requirements

3. Related Standards

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