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New green standards for banks

European Banking Authority (“EBA”) tightens ESG reporting requirements for banks. On 24 January 2022, EBA published binding standards on Pillar 3 disclosure for ESG risks. In the course of its supervisory activities, the European Central Bank (“ECB”) has become aware that none of the banks it supervises comes close to meeting its supervisory expectations.

In the ECB study, half of the 112 banks surveyed said that climate change will have a “significant” impact on their business in the next 3-5 years. However, according to Frank Elderson, ECB board member and vice-chairman of the supervisory council, banks that did not declare a response, had not actually done sufficient analysis. Some banks have made progress in their own carbon neutrality, but the projects they finance are often not exactly carbon neutral.

As the EBA found the previous practice unsatisfactory, it intends to introduce new, stricter rules on banks’ ESG reporting requirements. Based on the supervisor’s experience, there were significant gaps in ESG reporting practices to date. The new rules give banks less leeway on what they do and do not have to disclose. Banks will no longer be allowed to use deliberately prolonged descriptions of the tasks they perform.

The new regulation allows banks to be benchmarked and requires them to report on how they are making themselves fit for purpose to meet the Paris climate agreement. To reduce the number of inaccurate reports with different language from one bank to another, ESG reports should meet the following requirements:

  • Quantitative information on exposures to carbon-related assets and assets vulnerable to both chronic and acute climate change events
  • Quantitative disclosures on mitigating actions to support counterparties in adaptation to climate change and transition to carbon-neutral economy
  • New indicators to gauge performance regarding financing activities that are consistent with the EU Taxonomy, including a green asset ratio (GAR) and a banking book taxonomy alignment ratio (BTAR) from December 2023 and June 2024, respectively.

The new ESG reporting requirements set by the EBA refer to banks’ so-called Pillar 3 obligations. Rules setting out the ESG reporting requirements are pending for approval by the European Commission. Given the urgency of the issue and the availability of data, EBA has focused on climate protection, but new instructions are also planned for the future, which will apply to banks’ trading books.