EC signs off on climate disclosure requirements for European banks

The European Commission has formally adopted requirements for EU banks to report on a broad scope of climate-related risk exposures and the actions they take to mitigate those risks.

Starting from 2024, regulated banks will need to provide detailed reports on how the transition and physical risks of climate change will impact their lending books. These include breakdowns of how well sector exposures are performing in relation to net-zero climate scenarios, scope 1-3 emissions by counterparty, the energy efficiency of real estate collateral, and aggregate exposure to their top 20 carbon intensive firms.

With regards to physical risk, banks will be required to disclose how loans and deposits might be exposed to “chronic and acute climate-related hazards”.

Finally, banks are to report the overall alignment of their lending book to the EU green taxonomy based on two newly introduced metrics: the Green Asset Ratio (GAR), to capture the proportion of green loans made to large European companies; and the Banking Book Taxonomy Alignment Ratio (BTAR), which is an assessment of a bank’s broader balance sheet.

Reporting GAR is largely expected to be a box-ticking exercise since large EU companies are required by law to disclose taxonomy-alignment, but BTAR has emerged as an area of contention between the EC and the European Banking Authority (EBA) due to anticipated data shortages on global and SME clients.

The two alignment metrics were unveiled in January by the EBA while the rules were still in draft stage. The body explained the inclusion of BTAR as important to incentivise banks to support the green transition of their whole client base and increase the accuracy of how institutions report climate-related exposures.

In August, the EC stepped in to request that the BTAR be disclosed on a “voluntary basis”, so as to limit the regulatory burden for smaller banks. The EBA originally proposed that the BTAR should be disclosed on a “best effort basis”.

The EBA later agreed to the EC’s changes but defended its initial formulation, saying: “While favouring the original wording as submitted to the European Commission, the EBA understands and accepts the amendments proposed in this point on the basis of enhanced proportionality.”

There will now be a four-month period where the European Parliament and member states can raise objections to the rules. EU banks are expected to start reporting the GAR and BTAR from June 2024, based on 2023 information.

The UNEP FI has developed a practical guide on how to report against both metrics, in partnership with European banking lobby the European Banking Federation.