1.  The EU’s pragmatic assessment of the need to promote sustainable investment in Europe

Regulation (EU) 2020/852, on establishing a framework to facilitate sustainable investment, requires that all companies be subject to disclosure requirements on how and to what extent their associated activities are environmentally sustainable. This information is referred to as non-financial information.

In September 2020, the European Commission sought the views of the three ESAs on the key performance indicators and methodologies to be implemented in order to provide transparent information on ESG risk to the market.

This report represents one of the important contributions of the EBA to this important work.

2.  The work of the EBA is fully in line with the EU regulation 2020/852, in particular article 8

Financial institutions and non-financial companies will start reporting on environmental targets for climate change mitigation and adaptation from 1 January 2022, based on data from 31/12/2021.

From January 2023, based on 31/12/2022 data, financial institutions and non-financial companies will have to start publishing similar information for the other environmental objectives, namely

  • Sustainable use and protection of water and marine resources;
  • The transition to a circular economy;
  • Pollution prevention and control ;
  • Protection and restoration of biodiversity and ecosystems.

A delegated act of the European Commission will specify the information to be provided for both financial and non-financial companies.

The deadline for responding to the EU Commission’s request was the end of February 2021.

3.  The entry into force of the green asset ratio: the GAR

3.1.   Definition of RBM

The Green Asset Ratio (GAR) is defined as the share of the credit institution’s assets invested in green economic activities meeting sustainability criteria in relation to total eligible assets (depending on the scope of the instruments, the counterparties and the location of the activities).

Green assets are financial assets that finance a sustainable economy and contribute substantially to climate change mitigation and/or adaptation.

The RAG will be defined on the basis of exposures according to the prudential scope of consolidation, and for the types of assets and accounting portfolios defined as relevant, including information on stocks and flows, on transitional activities and on traditional and specialised financing.

3.2.   RBM publication requirements

Credit institutions should publish forward-looking information and targets for the proposed KPIs.

Credit institutions should disclose the aggregated RAG for total eligible balance sheet assets, and the breakdown by environmental objective, including climate change mitigation, adaptation and other environmental objectives, and by counterparty type.

In addition to the RBM, institutions must

  • Provide information on eligible assets (which can be valued) ;
  • Publish the percentage of their total assets that is covered by RBM.

3.3.   How the GAR is calculated

3.3.1.    Numerator of the GAR

It is the sum of green assets financing economic activities that substantially contribute to, or enable, climate change mitigation, adaptation or other objectives:

  • Loans and advances ;
  • Debt securities ;
  • Actions ;
  • Guarantees taken over ;
  • Total exposures.

Combining information on stocks and flows of financing on specialised versus conventional financing will show the share of banks’ exposures that finance the counterparty’s Capex/Opex for climate transition/adaptation purposes.

3.3.2.    Denominator of the GAR

It is the sum of the following eligible exposures according to the criteria defined in Regulation (EU) 2020/852

  • Total eligible loans and advances ;
  • Total eligible debt securities ;
  • Total eligible actions ;
  • Total eligible exposures.

Information on traditional financing will indicate the share of banks’ exposures financing the counterparty’s overall business.

4.  The content of the EBA report

This March 2021 ABE report:

  • Complement to the EBA opinion on the disclosure requirement for environmentally sustainable activities;
  • Defines the extent to which the activities of credit institutions and investment firms are linked to environmentally sustainable economic activities;
  • Clarifies the definition of environmental KPIs on sustainability:
    • The green asset ratio (GAR) for the different portfolios and targets at the balance sheet and aggregate level;
    • A KPI for the most relevant off-balance sheet assets (assets under management and collateral);
    • A ratio based on fees and commissions for services other than financing and asset management;
    • A separate KPI proposed only for credit institutions with a large trading book.
  • Specifies the exposures to be covered by the green asset ratio;
  • Clarifies the methodology for disclosure by credit institutions and investment firms related to climate change mitigation and adaptation objectives:
    • Handling of portfolios for which publication is more difficult, due to the location of the counterparty (non-EU exposures) or the variable nature of the portfolio (trading portfolio).
  • Specifies the qualitative and quantitative information to be published by institutions;
  • Defines templates and instructions for the quantitative information used to calculate the KPIs;
  • Makes several proposals to support institutions in the process of preparing these publications;
  • Provides policy recommendations to the European Commission to facilitate transparency and disclosure by institutions;
  • Includes an assessment of the costs of implementing the environmental indicators and the information to be published:
    • The analysis is based on the information collected through the EBA surveys and workshops in the context of preparing the response to the European Commission’s request.

5.  References

Abbreviations and glossary

ESA: European Supervisory Authority

EBA: European Banking Authority

GAR: Green Asset Ratio

KPI: Key Performance Indicator