European bankers are pushing back against the increasingly strict environmental, social and governance (“ESG”) reporting requirements being passed in the European Union, yet their competitors in America aren’t required to adhere to those requirements. The European Banking Federation (“EBF”) recently said that as long as Wall Street continues to ignore ESG rules, European lenders who adhere to American ESG rules will find it impossible to compete with their U.S. counterparts.
ESG has been one of the largest trends in the financial sector for the past several years, partly due to being pushed by major investment companies, such as BlackRock, and the deafening call for greater corporate accountability and sustainability. According to these requirements, companies have to continually enhance their ESG reporting to show how their corporate activities harm the environment and community as well as the steps they have taken to mitigate their effect on surrounding communities.
ESG reporting hasn’t been limited to the United States alone; the ECB recently pressured lenders in the regional bloc to capture environmental, social and governance risks such as loan-risk provisions and heralded a new era of ESG reporting standards in the European Union.
Still, the ECB is on the hunt for evidence that European banks can deal with losses caused by “emerging risks” such as carbon emissions by clients or the rising expenses associated with natural resource consumption. According to a review published in 2023, most of the banks in the European Union still aren’t prepared to deal with the emerging risks associated with ESG reporting.
A year after the review was published, EU regulators are adopting a different tune compared to their counterparts in the U.S. Banks in the EU are now subject to increased disclosure regulations, ESG-adjusted capital requirements and a potential explicit climate buffer. EU regulators say these strict requirements will help EU banks deal with emerging risks efficiently over the next several years.
On the other hand, the U.S. is experiencing GOP-led opposition to anything ESG-related that has resulted in a mass walk-back of planned ESG guidelines and rules.
The EBF, an umbrella organization overseeing all banking associations in Europe, is worried that banks will have to sacrifice their financial reserves for hard-to-quantify risks even before they receive clear instructions from regulators. EBF senior policy adviser for sustainable finance Denisa Avermaete notes that ESG buffers are particularly problematic because they are “exclusively” a European tool. Avermaete added that moving forward with the new ESG requirements without taking time to fully review the “prudential framework” for climate risks could potentially lead to “double counting.”
While bankers in Europe are pushing back against ESG investment guidelines, individual companies such as Coyuchi Inc. in North America are marking themselves as entities that personify sustainability in their entire value chain, a practice that is winning over customers.
NOTE TO INVESTORS: The latest news and updates relating to Coyuchi Inc. are available in the company’s newsroom at https://ibn.fm/COYU
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