What is the Green Asset Ratio (GAR)? What does it mean for banks?

Updated in September 2024‍

In 2024, approximately 150 EU banks have to disclose their Green Asset Ratio (GAR) for the financial year 2023. This means that banks need to provide quantifiable evidence that demonstrates the extent to which the activities they finance meet what the EU Taxonomy defines as sustainable. 

Thus far, banks’ climate ambitions and commitments have mainly consisted of redirecting capital towards green investments or reducing their long-term investments in fossil fuels. The GAR will bring a new element to these commitments, as it will provide a more transparent screenshot of a bank’s portfolio and its level of sustainability. Therefore, any discrepancies between climate goals and commitments, with what actually happens in practice, will be identified and tracked more quickly and clearly.

What is the Green Asset Ratio (GAR)?

According to the EU Taxonomy Disclosures Delegated Act, the GAR refers to the proportion of a credit institution’s assets that finance and are invested in EU Taxonomy-aligned economic activities as a proportion of the total covered assets. If you need a refresher on EU Taxonomy eligibility and alignment and how these are calculated check out our blogs on these topics.

In other words, the GAR is a ratio showing EU Taxonomy-aligned financial assets as a percentage of lenders' banking books. 

Challenges with GAR & How to Tackle Them

The main hurdles that come with calculating the GAR are twofold. On the one hand, it can be tricky to understand which assets must or must not be included. On the other hand,  it can be time-consuming to collect data on the assets and whether they are EU Taxonomy-aligned or not. These issues can be tackled as follows. 

Issue One: Understanding the Assets to Include in GAR

First, the bank needs to separate the financial assets from the on-balance (debt and equity assets and liabilities) and the off-balance sheet (Financial guarantees, Assets under Management).

Second, the exposures to central governments, central banks and supranational issuers need to be excluded from the calculation of the numerator and denominator of the GAR, as well as the assets held for trading (which will also be subject to their own disclosure, i.e the trading book KPI). For the first, the reason for excluding them is that no guidelines have yet been disclosed on how to assess the EU Taxonomy alignment of such large-scope entities. Assets held for trading are also excluded as they are acquired mainly with the purpose of selling and/or repurchasing in the near term, which is less compatible with the nature of EU Taxonomy-aligned investments. In addition, the bank will have to disclose its Trading Book KPI by 2026 (see delegated Regulation (EU) 2021/2178).

Finally, some assets are excluded from the numerator but integrated into the denominator, including exposures to undertakings that are not under the NFRD, derivatives, on-demand interbank loans, cash and cash-related assets as well as “other assets” (e.g. goodwill, commodities, etc…). These could be considered as 100% not eligible (and then 100% not aligned).

Assets that are considered in the numerator of the GAR include loans and advances, debt securities, equity holdings and repossessed collaterals. For those loans where the use of proceeds is unknown (general-purpose loans), the turnover and CapEx alignment of the loan will be the same as the emitting asset. In the case of a loan where the use of proceeds is known (specific-purpose loans) the EU Taxonomy-alignment data needed is provided for the activity(ies) to which the proceeds will be applied.

Credit institutions must disclose GARs at an aggregated level over all exposures, as well as its breakdowns by environmental objective, type of underlying positions, such as loan and advance or equity, and by type of counterparty, for example, non-financial corporates or insurance undertakings.

In addition, the GAR must be disaggregated between its stock positions, previously existing positions, and its flow positions, new loans and advances or other positions because these are included on the on-balance sheet during the reporting exercise

Issue Two: Gathering the Right Data for GAR

The second issue is related to data availability. As mentioned, only undertakings that are under the scope of NFRD and, consequently, which need to disclose their EU Taxonomy alignment in 2024 must be included in the GAR numerator. This data should therefore be publicly available. However, many observers stress that corporates are not ready to calculate their EU Taxonomy-alignment due to various reasons (inadequacy of accounting system, insufficiently granular data, lack of understanding of the regulation) (see for example the reports from EBF and UNEP-FI: Testing the application of the EU Taxonomy to core banking products and Practical approaches to applying the EU Taxonomy to bank lending). Consequently, scores could be very low, remain hidden or even unpublished. 

In addition, for loans contracted for households (e.g. mortgage, renovation, car loans) or repossessed by real estate, the bank will need to screen the assets itself. This task can be substantial as banks can have a significant number of such loans and the criteria for these activities is often country-specific.

How to Prepare and Make the Best Out of the GAR Disclosure?

Due to the limited scope of the GAR numerator and the lack of readiness of non-financial undertakings, banks’ GAR scores are expected to be low at the start. In May 2021, in its first EU-wide pilot exercise on climate risk, the EBA estimated an average GAR of 7.9% for a sample of 29 EU banks. The first published reports from banks feature even lower alignment levels around 2 to 3% (according to Barclays and ING research). As a result, the relevance of the GAR comparison between banks will be limited at first but will increase as more undertakings are included in the scope. 

To enable banks to measure their GAR better, they may include an additional section with information that outlines their score if they were to include non-NFRD undertakings in their GAR numerator under certain conditions, the undertakings should: 

• not contradict or misrepresent the mandatory information.
• not be given more prominence than the mandatory disclosures.
• include supporting details setting out the basis for voluntary disclosures.
• include details on methods used for their preparation, with a clear explanation of how this differs from mandatory reporting.

The GAR including non-NFRD undertakings is also the definition of the Banking Book Taxonomy Alignment Ratio (BTAR), which banks will be strongly advised to disclose under the EBA Pillar III Disclosures on ESG Risks as of June 2024. For more information, discover our article on Pillar III Disclosures on ESG risks.

Given that non-NFRD undertakings are not mandated to calculate their EU Taxonomy alignment, proxies can be used for them when no other information is available (but never for the GAR!). However, even among proxy providers, limited data exists for Small & Medium Enterprises (SMEs).

GAR Disclosure: Tips & Recommendations

Given all the challenges mentioned, the EBF and UNEP-FI  gathered a group of 24 banks and 12 banking associations to test and discuss the application of the EU Taxonomy to banks’ lending products. The report generated a set of steps to help apply the EU Taxonomy to core banking products: 

• Step 1: As far as possible, define the use of proceeds of the loan or credit facility.
• Step 2: When the use of proceeds is not specified, classify exposure on the basis of clients’ business activities.
• Step 3: Decide into which EU Taxonomy category the transaction, activity or company falls - Mitigation, Adaptation, Enabling, Transitioning, etc.
• Step 4: Require clients to disclose the necessary information to meet Technical Screening Criteria (TSC) and MSS.
• Step 5: TSC for Substantial Contribution should be strictly met based on evidence.
• Step 6: Subject to a materiality judgment, DNSH and MSS assessments may rely on the assumed compliance of clients and assets with relevant legislation. They may also rely on certification schemes and labels and require timing flexibility. Indeed, it may be challenging to conclude assessments before transactions are finalised.

Moreover, the report highlighted several recommendations:

• Need for compatibility/comparability of criteria between the EU Taxonomy and other applicable legislation and regulations, including at national level.
• Interest in the alignment of taxonomies to facilitate international data collection and provide comparability mechanisms of criteria for the applicability of the EU Taxonomy beyond EU borders.
• Need for tools to facilitate the collection and handling of data and consequently, facilitate the application of the EU Taxonomy.
• Banks should start methodical data collection for taxonomy-relevant information as part of new origination, on a best-effort basis, based on internal strategy and priorities.

Finally, on a more technical note, the report states that “most banks cite the challenge of adapting internal information processes and the cost of developing IT tools and support.”

About Greenomy

Greenomy is at the forefront of ESG reporting solutions, offering global organisations a seamless pathway to compliance with key frameworks, such as the CSRD and EU Taxonomy. Greenomy is also a proud member of the European Banking Federation (EBF) and collaborates with them to co-author reports submitted to the European Commission. These reports reflect our feedback on the application of the EU Taxonomy for banks and non-financial companies, drawing on insights from our client experiences, among other sources.