Banking and Capital Markets Law, Financing12.01.2024 Newsletter
Lending decisions: 7th MaRisk Amendment and ESG risks
The 7th MaRisk Amendment specifies the handling of ESG risks in lending decisions. Borrowers must now provide information on potential ESG risks during the approval process.
On 29 June 2023, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) published the 7th Amendment to the Minimum Requirements for Risk Management (Mindestanforderungen an das Risikomanagement, "MaRisk"). Among other things, these specify the BaFin's expectations with regard to how the institutions it supervises should deal with ESG risks. They follow on from the BaFin Guidance Notice on Dealing with Sustainability Risks from 2019.
The Guidance Notice initially contained non-binding guidance and good practice approaches, but was temporarily downgraded in BaFin's priority list in 2021 during the COVID crisis. The topic of ESG is now back in the focus of supervision. According to the BaFin, ESG risks do not form an independent risk category, but can have an impact on all risk types addressed in the MaRisk, such as counterparty default risks, market price risks, liquidity risks and operational risks.
The 7th MaRisk Amendment also implements the relevant sections of the EBA Guidelines on Loan Origination and Monitoring. In connection with the credit approval process, borrowers increasingly have to provide information on potential ESG risks relevant to them, which enables the bank to assess the ESG risks of a credit decision. According to section 4.3.5 of the EBA Guidelines, these include in particular physical risks that can negatively impact the financial performance of borrowers, such as liability risks relating to the causation of climate change or conversion risks that may arise for the borrower from the transition to a low-CO2 -emission and climate-resilient economy. Examples of these risks are necessary new investments in machinery, rising energy prices or interruptions in the energy supply.
Further possible risks relate to changes in market or consumer preferences as well as legal risks that may affect the recoverability of the underlying assets. Section 4.3.6 of the EBA Guidelines specifies additional requirements for granting so-called "environmentally sustainable credit facilities". Such risks include ensuring that the loan funds are used for environmentally sustainable activities. This requires information from the borrower about its climate-related and environmentally or otherwise sustainable business objectives. Information about the projects to be financed is also required. The borrower must monitor the proper allocation of the proceeds and prepare corresponding reports.
The valuation of collateral for a credit exposure must also take ESG risks into account where relevant. As an example, the MaRisk mentions the energy efficiency of buildings (BTO 1.2.1. para. 2).
The addressees of the MaRisk must take ESG risks into account not only when making their initial decision to grant a loan, but also in regular or required risk reassessments and as part of procedures for the early identification of credit risks. Hence, borrowers will have to provide information more than just once at the beginning of the relationship.
