EBA publishes final draft of technical implementation standard on supervisory disclosures on ESG risks

09 March 2022

The EBA has published the final draft of the technical implementation standard for Pillar 3. This includes extensive disclosure requirements in the areas of climate risks, mitigating measures, ESG ratios (Green Asset ratio & Banking Book Taxonomy Alignment ratio) and qualitative characteristics. In its development, the EBA relied, among others, on the Task Force on Climate-related Financial Disclosure of the Financial Stability Board.

On January 24, 2022, the European Banking Authority (EBA) published the final draft of the implementing technical standards (ITS) on supervisory disclosure on ESG risks under Article 449a CRR. This includes clear requirements for the disclosure of ESG (Environmental, Social & Governance) risks under Pillar 3. The aim of the standard is to ensure that stakeholders are well informed about the company's ESG exposures, risks and strategies in order to make informed decisions. Essentially, the EBA expects disclosure in four areas:

1. 1. Climate risks:
      For the disclosure in the area of climate risks, information is to be presented on exposures and assets that are affected by transitory and physical risks. In the case of transitory risks, the main sectors affected are those that contribute significantly to climate change, for example through high CO2 emissions. With regard to physical risk, it is necessary to take a closer look at sectors and geographical locations where the probability of extreme weather events or the occurrence of heat damage and extreme drought is high.
   2. Mitigating measures:
      These are essentially the measures taken by banks to mitigate climate risks. In addition, the financial support and activities provided to the economy in the transition and adaptation process are considered.
   3. New ESG metrics:
      The EBA has unveiled two new metrics to show how institutions are supporting activities to achieve the Paris climate targets. Both metrics are based on the EU taxonomy and are intended to show the extent to which funded activities are in line with the Paris Agreement.
      Green Asset ratio (GAR): 

      The Green Asset ratio provides information on exposures to companies and private customers from non-financial reporting (NFRD - Don-Financial Reporting Directive) that finance activities aligned with the taxonomy. This includes financing of activities that significantly contribute to climate change mitigation (CCM) & climate change adaptatio (CCA). Reliable data for this metric is expected from December 2023.

      Banking Book Taxonomy Alignment ratio (BTAR):

      The Banking Book Taxonomy Alignment ratio includes exposures to entities that are not part of the NFRD and therefore not considered in the GAR, while being consistent with the objectives of the Paris Agreement and thus making a significant contribution to CCM and CCA. For the BTAR, the EBA expects reliable data from June 2024. A simplified approach should be possible based on bilateral information.

   4. Qualitative characteristics:
      Qualitative information on environmental, social and governance issues of banks is expected. This includes in particular governance regulations, risk management, corporate governance, the business model and business strategy.

The development of this standard is based on recommendations of existing initiatives, including the Task Force on Climate-related Financial Disclosure (TCFD) of the Financial Stability Board (FSB). However, the EBA has gone beyond the recommendations by defining additional mandatory granular templates, tables and instructions. This is intended to ensure better comparability, consistency and informative value of the disclosures.

In order to maintain proportionality, measures have been integrated to facilitate disclosure by the institutions. These include the granting of transition periods and the possibility to use estimates.

Source: https://www.eba.europa.eu/eba-publishes-binding-standards-pillar-3-disclosures-esg-risks

To the author:

Philipp Ehren has been a senior consultant at CURENTIS AG since 2021. He has several years of experience in project work in risk management with a focus on IT applications. He also specializes in sustainable/green finance.

Philipp Ehren will also be a speaker at the webinar offered by HAYS and CURENTIS, "ECB Climate Stress Test 2022: How do climate risks change banking supervision?" on 10.03.22 from 17:30-18:30. Click here to register https://www.hays.de/lp/webinar-ezb-klimastresstest-2022