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    EBA Sets Out Standards for Pillar 3 Disclosures of ESG Risks

    The European Banking Authority (EBA) published the final draft implementing technical standards on Pillar 3 disclosures on environmental, social, and governance (ESG) risks. The standards put forward comparable disclosures and key performance indicators, including a green asset ratio (GAR) and a banking book taxonomy alignment ratio (BTAR), as a tool to show how institutions are embedding sustainability considerations in their risk management, business models, and strategy and their pathway toward the Paris Agreement goals. EBA has also set out the disclosure timelines, granular templates, tables, and instructions to ensure enhanced consistency, comparability, and meaningfulness of these disclosures by institutions.

    In line with the requirements laid down in the Capital Requirements Regulation (CRR), the draft implementing technical standards set out comparable quantitative disclosures on climate-change related transition and physical risks, including information on exposures toward carbon-related assets and assets subject to chronic and acute climate change events. They also include quantitative disclosures on institutions’ mitigating actions supporting their counterparties in the transition to a carbon-neutral economy and in the adaptation to climate change. In addition, they include key performance indicators on institutions’ asset-financing activities that are environmentally sustainable according to the European Union taxonomy (GAR and BTAR), such as those consistent with the European Green Deal and the Paris Agreement goals. The final draft implementing technical standards provide qualitative information on how institutions are embedding ESG considerations in their governance, business model, strategy, and risk management framework. EBA has also integrated, into the standards, proportionality measures that should facilitate disclosures by institutions, including transitional periods and the use of estimates. The EBA ESG Pillar 3 package will help to address shortcomings of institutions’ current ESG disclosures at the European Union level by setting mandatory and consistent disclosure requirements, including granular templates, tables and associated instructions. It will also help establish best practices at an international level.

    Institutions will have to start disclosing this information from June 2022. The first disclosure will be annual and it will be semi-annual thereafter. This means that in practice the first disclosure will take place in 2023 for the disclosure reference date as of the end of December 2022. 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. The disclosure of information on the GAR will start to apply in 2024 for data as of end-2023 while the additional and separate information on the BTAR will apply from June 2024, which means that institutions will include this additional and separate key performance indicator in their end of June 2024 disclosure reference date Pillar 3 reports for the first time. Information on environmentally sustainable exposures (CCM) in Template 1 will be disclosed by institutions starting from end of December 2023 (for exposures included in the numerator of the GAR) and end of June 2024 (for exposures included in the numerator of the BTAR only) as the first disclosure reference date. 

    EBA expects reliable data for the GAR from December 2023 for counterparties subject to the the Non Financial reporting Directive, or NFRD, disclosure obligations and households and on the BTAR from June 2024. These implementing technical standards will amend the final draft implementing technical standards on institutions’ public disclosures with the strategic objective of defining a single, comprehensive Pillar 3 framework under the CRR that should integrate all the relevant Pillar 3 disclosure requirements. This will facilitate institutions’ implementation and enhance clarity for users of such information, as expressed in the EBA Pillar 3 roadmap. When developing these standards, EBA has built on the Financial Stability Board Task Force on Climate-related Financial Disclosures (FSB-TCFD) recommendations, the European Commission’s non-binding guidelines on climate-change reporting, and the European Union Taxonomy. EBA has deliberately designed the key performance indicators on taxonomy alignment disclosure requirements so they match the data and timelines that large corporates under the Non Financial reporting Directive are required to produce following Article 8 of the Taxonomy Regulation. EBA also set out guidance that banks should capture ESG information in the EBA Loan Origination and Monitoring Guidelines.

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    Keywords: Europe, EU, Banking, Lending, ESG, Climate Change Risk, Credit Risk, Loan Origination, Basel, Pillar 3, Disclosures, Reporting, NFRD, CRR, EBA

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