Pillar III Disclosures on ESG risks: A new tool for bank investment transparency

The Capital Requirements Regulation

To understand where this regulation originates, we need to take a few steps back. 

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, and risk 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.

1. 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.
2. Energy efficiency of real estate collateral in the loan portfolio.
3. Alignment of counterparties’ scope 3 emissions with sectoral ‘net zero by 2050’ scenarios created by the International Energy Agency (IEA).
4. Exposure to the top 20 carbon-intensive firms in the world.

Physical risks

1. Degree of exposure towards non-financial corporates and real estate collaterals exposed to chronic and acute climate-related hazards.

Mitigation actions: This section, mainly based on the EU Taxonomy disclosure, 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.

1. Summary of Green Asset Ratio (GAR) templates 7 and 8.
2. GAR: Breakdown of exposures by sectors and proportion of these exposures that are Taxonomy-eligible and Taxonomy-aligned.
3. 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.
4. 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).
5. 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.

It should be noted that the scope of application of Article 449a (large institutions with traded instruments) is smaller than that of Article 8 of the EU Taxonomy Regulation (institutions subject to an obligation to publish non-financial information under the NFRD), and therefore only a subset of the institutions that will have to disclose the GAR under Article 8 of the Taxonomy Regulation will have to disclose it in their Pillar 3 reports.

How Greenomy can help banks with their Pillar III Report

Banks will need to gather data from a large number of stakeholders. However, finding parts of this data will not be straightforward, this includes in particular: exposure to physical risks, counterparties’ scope 3 emissions, the Taxonomy-alignment of non-financial corporations in the short-term and more generally non-NFRD entities (including SMEs).

The business model of Greenomy is to simplify NFRD, SFDR, and EU Taxonomy reporting by connecting all stakeholders together. A bank joining Greenomy will automatically retrieve data from its counterparts that are part of the ecosystem and will be able to invite those that are not yet a part of it.

Therefore, do not hesitate to get in touch and book your demo today!

*An institution is considered “large” if it meets any of the conditions in Article 4(146) of the CRR, namely if:

• It is a “Globally Systemically Important Institution“, as defined in Article 131 of the CRD;
• It is an “Other Systemically Important Institution“, as defined in Article 131 of the CRD;
• It is one of the three largest institutions in terms of total value of assets in the Member State in which it is established; and/or
• The total value of its assets on an individual basis, or, where applicable, on the basis of its consolidated situation in accordance with the CRR and the CRD, is equal to or greater than €30 billion.