ESG: Preparation for supervision meeting

– Part 3

Sustainability continues to gain importance and the implementation status of the individual institutions is surveyed in the annual meeting with the banking supervisory authorities. The following article covers the third part of the preparation for the supervisory interview and deals with possible interview contents regarding sustainability.

All relevant persons participating in the supervisory discussion from the perspective of banks and financial services companies, such as board members, managing directors, heads of risk management, etc., should deal with the topic of ESG more intensively in advance. Good and thorough preparation is one of the success factors in the supervisory interview. Sustainability issues are also being scrutinized more closely in the context of Section 44 of the German Banking Act (KWG) and discussed by the supervisory authorities with the institutions.

Axel Becker and Johannes Hugo

Axel Becker & Johannes Hugo
Regulartech-IT-Audit-Consult & ADWEKO

Preparation for the supervisory interview

Based on the BaFin bulletin on dealing with sustainability risks as of 13.01.2020 and the questions asked in the subsequent supervisory survey, the following questions could be asked in the supervisory interview:

To what extent does the institute address sustainability and sustainability risks?
  • Involved business units, risk management, sustainability officer, organizational structure and processes, competencies
If yes, for what reasons does the institute deal with sustainability risks (these will be questioned in the interview – multiple answers possible)
  • Actively exploit market opportunities (future viability)
  • Actively manage sustainability risks (alternative structure of active management)
  • Identify/monitor sustainability risks
  • Avoid reputational damage
  • Implement regulatory requirements such as MaRisk
  • Association recommendations (DSGV, VÖB, Geno-Verband, Verband Auslandsbanken, etc.)
  • Customer demands/expectations
  • Other
What content topics are covered by sustainability?
  • Sustainability risks are physical and transitory risks and addresses physical and transitory risks
  • Consideration of sustainability in terms of social factors (e.g. compliance with UN labor standards)
  • Consideration of sustainability in terms of governance (e.g. compliance with legal and regulatory requirements)
Possible risk types affected by sustainability risks
  • Counterparty default risk
  • Market price risk
  • Liquidity risk
  • Operational risk
  • Image/reputation risk
  • Other risk
Sustainability risks that contribute to the materiality of the above-mentioned risk types – multiple answers are possible here
  • Counterparty default risk
  • Market price risk
  • Liquidity risk
  • Operational risk
  • Image/reputation risk
  • Other risk
Have sustainability risks been integrated into the institution’s banking and strategic orientation?
  • If yes, answer follow-up question
What content has been incorporated into the business strategy?
  • Discontinuation of business areas (e.g. with negative SEG ratings)
  • Restriction of business areas
  • Development of business areas (e.g. solar financing)
  • Requirements customers/ third parties
  • On the exercise of voting rights
  • About other engagement
  • About other determination
  • Further
Adoption in the business strategy – multiple answers are also possible here
  • ESG-specific limits/exclusions
  • Regional/ country-specific limits/ exclusions
  • Sector-specific committees (e.g. no investments in coal-fired power plants, etc.)
  • About hedging mechanisms
  • Over a longer planning horizon
  • About other determinations
  • Further
Does a separate sustainability strategy exist within the Institute’s strategy package ?
  • Open answers are possible
  • Information about the ESG strategy e.g. also about possible publication on the Internet, internal publication (intranet etc.)
  • More
Which area is responsible for integrating sustainability risks into the strategic direction of the institute?
  • Open answer possible
  • The Board of Management, the Executive Board, the persons responsible pursuant to Section 25 a of the German Banking Act (KWG) and the associated organization shall deliver to
If there are other officers in the institution that support management involvement in sustainability risks, what are they?
  • Board Staff
  • Compliance function
  • Internal audit
  • Market Function/ Front Desk
  • Back office
  • Special sustainability unit
  • Other function holders (such as Risk function etc.)
How is sustainability risk management integrated into the organization?
  • Risk Controlling Function
  • Compliance function
  • Internal audit (only audit of sustainability from 3rd line of defense possible)
  • Dedicated unit for identifying, measuring, managing, and reporting sustainability risks
  • Risk Committee and/or other bodies of the
  • The Executive Board has an advisory function
  • No special definition of responsibility
  • Other (other possible solutions)

Scope of regulation

A comprehensive ESG implementation is expected by means of the 7th MaRisk amendment. The draft of the 7th MaRisk amendment has been available for consultation since September 2022. Institutions can already prepare for compliance with the new requirements as part of their MaRisk/ ESG implementation projects.

Our recommendation

Deal with the ESG topics and the internal implementation status as soon as possible and check which preparations are necessary for the supervisory meeting. We at ADWEKO and Regulartech-IT-Audit-Consult are happy to support you in ESG preparation and implementation as well as in determining your implementation needs and efforts.

talk to

Johannes Hugo