EBA finalises rules on climate risk disclosures for banks

In addition to the disclosure obligations under the Taxonomy Regulation ((EU) 2020/852 – Taxonomy), the Non-Financial-Reporting Directive (2014/95/EU – NFRD) and the Disclosure Regulation ((EU) 2019/2088 – SFDR), Article 449a of the Capital Requirements Regulation ((EU) 2013/ 575 – CRR) also provides for disclosure obligations regarding ESG risks for large credit institutions with securities traded on a regulated market of any Member State. After a consultation phase last year, the European Banking Authority (EBA) has now presented its final draft for implementing technical standards (ITS) for these disclosures.

The new obligations are part of the single, comprehensive Pillar 3 disclosure framework under the CRR and will be integrated in the Implementing Regulation (EU) 2021/637, which requires firms to publicly disclose information relating to their risks, capital adequacy and policies for managing risk, with the aim of promoting market discipline. The Pillar 3 ESG disclosures especially aim to allow investors and stakeholders to compare the sustainability performance of institutions and their financial activities. The new rules will show how climate change may exacerbate other risks within institutions’ balance sheets, how institutions are mitigating those risks, and their ratios on exposures financing EU taxonomy-aligned activities. The draft ITS therefore introduces uniform, comparable disclosures and sets out ten granular templates, three tables and accompanying instructions to ensure consistency and comparability (available for download here and here).

It also provides for the disclosure of both quantitative and qualitative data. Quantitative disclosures are required on climate-related transition and physical risks as well as on institutions’ mitigating actions. The latter also cover key performance indicators (KPI) on institutions’ assets financing activities that support their counterparties in the transition to a carbon neutral economy and in the adaptation to climate change and that are environmentally sustainable under the Taxonomy, namely the Green Asset Ratio (GAR) and the Banking Book Taxonomy Alignment Ratio (BTAR). The disclosures on transition and physical risks cover information on real estate exposures, exposures towards carbon-related assets or those exposed to acute climate change events. Furthermore, accompanying reports with qualitative explanations on how institutions are embedding considerations on environmental, social and governance risks in their governance, business model, strategy and risk management framework have to be published.

The BTAR offers extended information on the level of Taxonomy alignment of exposures towards non-financial corporates not subject to NFRD disclosure obligations. The EBA introduces this new KPI since the Delegated Act under Article 8 Taxonomy ((EU) 2021/2178) excludes all exposures to such undertakings from the numerator, but not from the denominator of the GAR, which leads to these exposures being classified as 0% Taxonomy-aligned. The BTAR is intended to counter a possible negative impact of this classification on lending activities to such undertakings as supporting them in the transition and adaption process would not be reflected in the GAR.

How is the necessary data collected/generated?

When developing the standards, EBA has considered the recommendations of the Financial Stability Board Task Force on Climate-related Financial Disclosures, the Commission’s non-binding guidelines on climate-change reporting and the Taxonomy. The required data is aligned with existing ESG disclosure requirements and with data collected in accordance with the EBA Loan Origination and Monitoring Guidelines.

Data to calculate the GAR should e.g. come from disclosures by large corporates under the NFRD required by the Taxonomy. Information for the calculation of the BTAR will be obtained, where possible, directly from counterparties or by using estimates.

When will the obligations start to apply?

Institutions will have to disclose the information from 28 June 2022. The disclosure will be annual in the first year and semi-annual thereafter. This means that the first disclosure will take place in 2023 for the disclosure reference date as of 31 December 2022 (or relevant end-of-year disclosures for financial years not ending in December).

To facilitate the introduction for the institutions, EBA grants transitional periods and takes into account the principle of proportionality. A phase-in period until June 2024 (end of June 2024 first disclosure reference date) is proposed for disclosures on institutions’ scope 3 emissions and alignment metrics to give institutions enough time to collect the necessary information on CO2 emissions from their counterparties and implement estimation methodologies.

The disclosure of information on the GAR starts to apply in 2024 for data as of the end of 2023 while the additional and separate information on the BTAR will apply from June 2024, so that institutions will include the BTAR in their end of June 2024 disclosure reference date 3 reports for the first time.

Next steps

The draft ITS now needs to be adopted by the European Commission. If the European Parliament and the Council do not raise any objections after its adoption, the ITS will be published in the Official Journal of the EU.

The draft ITS is to be understood as a first step towards the full implementation of transparency requirements for ESG risks in Pillar 3. It focuses on the environmental aspects of ESG, namely qualitative and quantitative information on physical and transitory climate risks. So far, only qualitative information is required on social issues and aspects of corporate governance. However, in the following two implementation phases, EBA intends to add additional quantitative information on further environmental indicators and, for the first time, quantitative indicators on social and governance risks.

Another interesting point worth mentioning is that the CRR III draft from October 2021 proposes to extend the disclosure obligations under Art. 449a CRR to all institutions rather than only large credit institutions with securities traded on a regulated market of any Member State. It remains to be seen whether this draft amendment will survive the legislative process or be removed in the meantime.