EBA: draft technical standards on Pillar 3 disclosures of ESG risks

On 1 March 2021, the European Banking Authority (EBA) launched a public consultation on draft implementing technical standards (ITS) for Pillar 3 disclosures of environmental, social and governance (ESG) risks, under its capital requirements regulation (CRR) mandate. The consultation will end on 1 June 2021.

Large banking institutions with securities traded on a regulated market of any EU member state will be required to disclose prudential KPIs on the ESG risks facing their balance sheets, how these risks are being mitigated, and a green asset ratio (GAR) showing the alignment of financing with the EU taxonomy.

What are the EBA requirements?

The EBA will mandate disclosures across four main categories, as shown in the table below.

Timeline

The first set of disclosures will be due by 31 December 2022 and biannually after that (i.e. by 30 June and 31 December of each year). As shown in the table above, the EBA has adopted a proportionate approach by proposing a 2024 deadline for certain metrics.

The timeline and content of disclosures are aligned with the phase-in approach of the Taxonomy Regulation:

• From 28 June 2022, institutions must disclose quantitative information on climate risks under Pillar 3 disclosures on ESG risks – Taxonomy Regulation disclosures on climate change mitigation and adaptation are applicable from January 2022.
• Required disclosures on other environmental risks will be qualitative until after end-2022, when the relevant Taxonomy criteria become applicable. 
• The EBA will mandate quantitative disclosure requirements for social risks if the Taxonomy is extended to include these.

What firms need to do now

1. Streamline and leverage processes relating to existing ESG regulations

The EBA’s expectations on sustainable finance disclosure do not exist in a vacuum. They are part of a suite of ESG regulation including (but not limited to) the Taxonomy Regulation, Sustainable Finance Disclosure Regulation (SFDR), revised Non-Financial Reporting Directive (NFRD) and ECB Guide on climate-related and environmental risks. 

Complying with each regulation (where applicable) should not be a separate process. Overlaps must be exploited to ensure quality disclosures and limit the compliance burden. Some examples can be found below:

• Disclosure on Taxonomy-alignment of exposures is also a requirement under the Taxonomy Regulation.
• The ECB Guide contains expectations concerning business models and strategy, governance and risk management – the three areas covered in EBA qualitative disclosure requirements on ESG risks. 
• Regulatory technical standards for SFDR, which the EBA co-wrote, will introduce advanced disclosure requirements from January 2022. These include carbon footprint and GHG intensity of investee companies, Scope 3 emissions (from 1 January 2023) and other environmental indicators, much of which will be invaluable to meeting the EBA’s requirements.

2. Review current reporting and processes for data collection

Banking institutions should review their existing reporting and internal data against the proposed disclosure requirements and formulate a plan to address the gaps by mid-2022. 

Sector-level data on the volume of exposures may be readily available, but few institutions can currently disclose the required ESG-related metrics surrounding these exposures. They will need to implement robust processes for counterparty data collection and accuracy checks during onboarding and periodic reviews and locate appropriate third-party data sources where necessary. 

3. Harmonise data and produce coherent metrics

Data will then need to be harmonised and aggregated to produce coherent metrics. Given the complexities and costs surrounding this process, institutions should start preparing now.

The past year has brought a shift in EU sustainable finance legislation, from guidelines to regulatory requirements, and the EBA’s expectations are yet another piece of the puzzle. These can be met with extensive preparation and an approach that considers the full scope of ESG requirements facing institutions – but time is of the essence.