The European Banking Authority (“EBA”) recently published final rules for lenders on how they must publish data on environmental, social and governance (“ESG”) risks, and how these risks may affect their balance sheets. The watchdog hopes that the proposed rules will help to “address shortcomings of institutions’ current ESG disclosures at EU level by setting mandatory and consistent disclosure requirements, including granular templates, tables and associated instructions.” In developing this framework, the EBA has built on the recommendations of existing initiatives, like those of the “Task Force on Climate-related Financial Disclosures (“TCFD”) of the Financial Stability Board (“FSB”)
The so-called “Pillar 3 disclosure requirements” will require businesses to disclose details about their risk management policies and capital resources associated with ESG. “Disclosure of information on ESG risks is a vital tool to promote market discipline” the EBA said as it published the proposals this week. Banks will be required to show how climate change may negatively impact other risks on their balance sheets through comparable disclosures, and to then inform investors as to how they are mitigating the potential risks. The rules also require that, from 2024 onwards, lenders are to publish two new ratios: a green asset ratio (“GAR”), and a banking book taxonomy alignment ratio (“BTAR”). In short, the ratios will show how many green assets a bank has as a proportion of its total assets and will measure how a bank’s activities are contributing to EU climate goals by financing sustainable activities, respectively.
Under the proposals, banks will have to set out quantitative disclosures on climate change risks, including details on their assets that are exposed to polluting companies, and further disclosures on how they are supporting the transition to a carbon-neutral economy. They must also provide qualitative details on how they are considering ESG in their governance, business model, strategy, and risk management framework.
The rules must first be approved by the European Commission. In April 2021, the Commission adopted the EU Taxonomy Climate Delegated Act, which seeks to create a common language for investors when they put funds into environmentally friendly projects – the EBA proposals aim to build on this and further increase financial flow towards “green” activities and avoid “greenwashing”.
Further details can be found here.