EBA consultation on prudential disclosures on ESG risks
Background
The EU Capital Requirements Regulation (CRR) includes a new requirement for large institutions with listed securities to disclose prudential information on environmental, social and governance (“ESG”) risks, including climate change transition and physical risks. These disclosure requirements will apply from June 2022 on an annual basis for the first year and then biannually. This represents a significant development in the existing Pillar 3 disclosure regime.
The EBA is mandated under CRR to develop draft implementing technical standards (ITS) specifying these disclosure requirements and has now released a comprehensive consultation paper under this mandate which sets out the templates for ESG disclosures, including:
- qualitative disclosures on ESG risks;
- quantitative disclosures on climate change transition risk;
- quantitative disclosures on climate change physical risk; and
- quantitative information and KPIs on climate change mitigating measures, including the green asset ratio (“GAR”) on taxonomy-aligned activities and other mitigating actions.
Summary of EBA’s proposed approach
The EBA is proposing a staged approach starting with quantitative information on climate change related risks, including transition and physical risks, the implementation of a GAR on EU taxonomy-aligned activities (a classification of sustainable activities aligned with the Paris Agreement under the EU Taxonomy Regulation), as well as quantitative information on other mitigating actions, and qualitative disclosures for ESG risks. The EBA also provides transitional relief (which in relation to certain disclosable items will be granted until 2024).
The consultation closes on 1 June 2021 and there will be a public hearing on the draft ITS on 26 March. For more detail, see the full consultation paper here.
In addition, the EBA has produced a summary of key disclosures and relevant examples:
| Item | What to disclose / examples of disclosures |
| Risk disclosures | Climate change transition risk (such as exposures to fossil fuel companies and for real estate exposures, energy performance of the collateral) Climate change physical risk (such as assets subject to impact from chronic climate change) |
| Mitigating actions | Actions that support counterparties in the transition to a carbon neutral economy/in the adaptation to climate change that do not meet the taxonomy criteria (such as building renovation loans that improve energy efficiency but do not meet the taxonomy criteria) |
| Green asset ratio (GAR) | Information on exposures towards taxonomy-aligned activities consistent with the Paris Agreement that contribute to climate change mitigation (CCM) (such as generation of renewable energy) and climate change adaptation (CCA) (such as afforestation) |
| Qualitative disclosures | Qualitative information on ESG (such as information on governance arrangements, business model and strategy and risk management) |
Pillar 3 as part of a bigger puzzle
The EBA discusses in some detail the interaction of the EBA’s prudential disclosures under CRR and the Investment Firms Review with other regulatory initiatives in respect of ESG disclosures such as the:
- Non-Financial Reporting Directive (“NFRD”), which applies to large public interest entities with more than 500 employees (such as large listed companies, banks and insurers) and requires disclosures on ESG and diversity information;
- Taxonomy Regulation, which applies to large public interest entities subject to the NFRD and defines environmentally sustainable activities (aligned with the Paris Agreement); and
- Sustainable Finance Disclosure Regulation (“SFDR”), which applies to financial market participants including financial advisers and financial firms offering investment services, and relates to financial advice and investment activities.
For more information on the EU’s sustainable finance package, see the Linklaters Sustainable Finance Sources: survival guide.
