ESG and bank regulation

Abstract

The evaluation of data based on environmental, social sustainability and respon-sible corporate governance-related factors (together: ESG), and the assessment of companies and of investments made in them on this basis, has hitherto es-sentially taken place within a market-based evaluative framework developing in an entirely evolutive manner. However, ESG has gained so much importance on capital markets in recent years that the voices calling for some of its aspects to be regulated anyway have grown increasingly louder. This is particularly the case in the banking sector, where – contrary to asset man-agement – ESG has seldom been in the spotlight thus far. As a reaction to this, the ESG approach is set to gradually materialise within EU bank regulation in the coming years, primarily in the context of risk management expectations and re-porting requirements, as well as in bank supervision. The new rules may present a significant challenge on less developed markets, and thus for Hungarian banks, principally in the area of data collection. Compliance will nevertheless have the positive benefit of enabling credit institutions to gain a more accurate picture of how sustainably their clients operate, and how resistant they are to climate change and other megatrends, as well as to the related sweeping and profound economic, social and regulatory changes.