Global Risk Regulator Quotes Marc Naidoo on EU Bank ESG Challenges

March 21, 2022

McGuireWoods London partner Marc Naidoo was quoted in a March 7, 2022, Global Risk Regulator article about the European Banking Authority’s disclosure requirements for EU climate goal contributions.

The article, titled “Climate change holds capital requirement implications for EU banks,” noted that under the EBA’s “Pillar 3” reporting standards, banks must make quantitative disclosures of climate change risks, including assets exposed to polluting companies, how they support the transition to a carbon-neutral economy, and how they consider ESG in their governance, business model, strategy and risk management frameworks.

There is some concern that the disclosure process and granularity of details required are complicated and burdensome, the magazine reported. The disclosure requirements could also force some companies to pursue investment from “underground” sources, the story noted. Naidoo said the disclosures will inevitably affect banks that do significant business in emerging markets.

“[These] banks face tough decisions regarding capital allocation, given that basic infrastructure funding involves companies and projects that are not always ESG-compliant,” Naidoo said. “An unintended consequence could be divestment en masse in developing economies, which would adjust risk-weighting ratios and provide necessary cover when stress-testing. However, the divestment would introduce private capital with less accountability, which could then prove counterproductive to what the Pillar 3 disclosures are trying to achieve.”

Naidoo, a debt finance partner, is a member of the five-person executive committee leading McGuireWoods’ ESG task force.