Greenomy - Pillar III Disclosures on ESG risks and transparency

Pillar III Disclosures on ESG risks and bank investment transparency

The Capital Requirements Regulation

The Basel Accords are a series of international recommendations for regulations in the banking industry. As they are not binding in and of themselves, the recommendations are enforced through national (or EU-wide) laws and regulations. The third of this set of recommendations, named Basel III, was created after the 2008 financial crisis and aims to:

• Improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source;
• Improve risk management and governance;
• Strengthen banks' transparency and disclosures.

The Basel III accords were implemented into EU legislation through the Capital Requirements Regulation (CRR) and Directive (CRD), headed by the European Banking Authority (EBA). Within this legislation exists the third Pillar on transparency and disclosure. The EBA was mandated to produce disclosure templates, the Implementing Technical Standards (ITS) of the so-called Pillar III disclosures on ESG risks, which were published (as a final draft) on the 24th of January 2022.

What must be disclosed?

The Final Draft of ITS requires the disclosure of qualitative and quantitative information in different tables and templates. It includes three tables for qualitative explanations on how institutions are embedding considerations on environmental, social, and governance risks, respectively. For each of these topics, three aspects must be addressed: business strategy & processes, governance, andrisk management. Then, ten templates are set up for quantitative disclosures: four on transition risks, one on physical risks, and five on mitigating actions.

Transition risks

The purpose of this section is to identify the degree of risk exposure that the institution’s underlying assets have to stricter carbon emission and climate related regulations:

• Gross carrying amount of loans and advances provided to non-financial corporates, classified by NACE sector codes and residual maturities, as well as counterparties’ scope 1, 2, and 3 greenhouse gas (GHG) emissions.
• Energy efficiency of real estate collateral in the loan portfolio.
• Alignment of counterparties’ scope 3 emissions with sectoral ‘net zero by 2050’ scenarios created by the International Energy Agency (IEA).
• Exposure to the top 20 carbon-intensive firms in the world.

Physical risks

The purpose of this section is to identify the degree of exposure towards non-financial corporates and real estate collaterals exposed to chronic and acute climate-related hazards.

Mitigation actions

This section provides information on institutions’ mitigating actions to support their counterparties in the transition to a carbon-neutral economy and in the adaptation to climate change:

• Summary of Green Asset Ratio (GAR) templates 7 and 8.
• GAR: Breakdown of exposures by sectors and proportion of these exposures that are Taxonomy-eligible and Taxonomy-aligned.
• GAR: Template built upon the information on exposures included in Template 7 with an additional distinction between a GAR for the stock of exposures, and a GAR for newly originated (‘flow’) exposures.
• Banking Book Taxonomy Alignment Ratio (BTAR): Breakdown of exposures by sectors and proportion of these exposures that are Taxonomy-eligible and Taxonomy-aligned including exposures towards corporates not subject to NFRD disclosure obligations (as opposed to the GAR).
• Information on other actions (not included in the EU Taxonomy) put in place by the institution to mitigate climate-change-related risks.

Who is affected by these disclosures and when to disclose?

Under Article 449a of the CRR, since 28 June 2022, “large institutions which have issued securities that are admitted to trading on a regulated market of any Member State“ are required to disclose information on ESG risks, on an annual basis for the first year and biannually thereafter. This means, in practice, that the first disclosures will take place in 2023 for the disclosure reference date of the end of December 2022.

Taking into account the challenges in terms of data availability for banks, the EBA has offered the possibility of a transitional period for certain disclosures, which implies that:

• The reporting of information on the GAR (Templates 7 and 8) is only required as of 31 December 2023.
• The reporting of information on the BTAR (Template 9), the bank’s financed scope 3 emissions (Template 1), and the counterparties’ alignment metrics with ‘net zero by 2050’ scenarios (Template 3), is only required as of June 2024.