ESG Risk Factors for European Banks: Review of 2022

DBRS Morningstar has released a commentary discussing how ratings or rating trends of publicly rated European banking organisations have been affected by Environmental, Social and Governance (ESG) factors in 2022.

Key highlights include:

• The number of banks identified as incurring ESG issues that were material to the ratings has broadly remained unchanged in 2022 compared to 2021. The only assessed significant factors to the ratings were Governance factors.

• Going into 2023, ongoing monitoring of AML issues remains high on the regulators’ agenda.

• In terms of Social factors, we expect increased scrutiny of so called “green” financial products will continue in 2023. This could negatively impact our ‘Product Governance’ factor if an issuer is materially exposed to legal and financial liability. Meanwhile, the threat of cyberattacks remains a concern.

• We have been closely monitoring environmental concerns and how European banks are consequently adjusting their risk management practices. Some European regulators published the results of their first climate-related stress-test in 2022, presented as learning exercises. There were no implications for European banks’ credit ratings, in part due to the purpose of these exercises being to enhance the participants’ capacity to assess climate risks.

“The most common ESG factors negatively affecting European banks’ credit profiles are Governance factors, followed by Social factors to a lesser degree,” said Vitaline Yeterian, Senior Vice President, Global Financial Institutions at DBRS Morningstar. “We expect this trend to continue in 2023. From a climate change standpoint, in 2023, the focus for European Banks will be on climate-related disclosures as requested by the European Central Bank and the European Banking Authority.”