How Banks Are Changing Their ESG Reporting Practices After EBA Regulation

2023 marked the beginning of the European Banking Authority’s (EBA) Pillar 3 disclosure requirements for large European banks reporting on sustainability initiatives and climate-related risks. Following this global trend, banking institutions in the U.S. continue to develop their ESG programs and infrastructure to support evolving regulation. 

As stated in their sustainability roadmap, the EBA believes, “financial institutions have a key role to play in managing risks and raising the funds for sustainable projects given their unique position in intermediating capital flows through their lending, investment, and advisory style. Credit institutions also have the technical expertise that is critical for assessing the risks and opportunities attached to sustainable assets.” 

To put their plan into action, the EBA implemented a comprehensive reporting framework earlier this year with the goal of promoting transparency, consistency, and enhancing market discipline. Central to this framework are requirements for banks to disclose intricate amounts of ESG data in very specific formats on a recurring basis.      

With reporting requirements expanding beyond large bank institutions in 2025, EBA Pillar 3 disclosures will necessitate that banks of all sizes in the EU calibrate internally to ensure their operating structures support ongoing regulation. It also lends an opportunity for these institutions to distinguish themselves as leaders among their peers. 

What are the EBA’s Goals for ESG Reporting? 

On the heels of existing initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD), and closing in on the 10th anniversary of the signing of the Paris Climate Agreement, the EBA laid the groundwork for Pillar 3 disclosures late last year. With the end goal of “defining binding granular templates, tables and instructions, to ensure enhanced consistency, comparability and meaningfulness of institutions’ disclosures.” 

The eight key objectives of the EBA Roadmap for Disclosures set the tone for the reporting framework and incorporate a holistic approach:

• Transparency and Disclosures: Facilitate access to information and promote market discipline
• Risk Management and Supervision: Ensure ESG risks and factors are integrated into risk management protocol and supervision
• Prudential Treatment of Exposures: Identify areas for potential enhancements to better decipher environmental and social risks
• Stress-Testing: Perform climate risk stress testing to identify vulnerabilities and deficiencies 
• Standards and Labels: Provide supporting definitions and methodologies for sustainable banking products
• Greenwashing: Identify and monitor greenwashing risks
• Supervisory Reporting: Integrate information on ESG risks
• ESG Risks and Sustainable Finance Monitoring: Monitor material ESG risks and developments in sustainable finance

The EBA Pillars Paving the Way to Transparency and Standardization 

The movement toward standardized ESG reporting reflects amplified demands from regulators and consumers within the financial sector to demonstrate sustainable practices that are relevant, tangible, and resonate with stakeholders. 

According to insights from McKinsey, “consumers are holding banks to higher ESG standards as well—in 2019, about 14 percent of total client-driven revenues were controlled by consumers whose banking preferences were influenced by concern about purpose and sustainability.”

It is undeniable that there is a growing need for banking institutions to evaluate, structure, and implement related processes and best practices. This will be critical to position themselves both in compliance with mandated regulations as well as to stay ahead of the curve competitively and garner positive reputational sentiment with their ESG initiatives.

The EBA’s disclosure requirements encompass four primary categories: 

• Carbon footprint assessment and evaluation of assets tied to climate change related transition and physical risks
• Counterparty support through transition to carbon neutrality and climate change adaptation
• Key performance indicators (KPIs) pertaining to sustainable finance metrics including Green Asset Ratio (GAR) 
• Qualitative assessment of ESG considerations within a bank’s governance, risk and operational framework

A Holistic Snapshot of Climate Exposures

A set of robust reporting templates issued by the EBA as part of Pillar 3 Reporting hold banking institutions accountable to proactively disclose climate-related risks and courses of action to mitigate them, exposures to green assets, and sustainability incorporation into risk management. 

The reporting framework extensively spans both qualitative and quantitative components that will be required semi-annually following initial reporting in 2023, including:  

• Qualitative information on Environmental, Social, and Governance Risks
• Exposure quality by sector metrics
• NACE sector exposures and maturity buckets
• Energy efficiency of collateralized property loans
• Alignment metrics
• Exposures to top carbon-intensive firms
• Climate change transition risk for trading portfolio
• Exposures to climate change physical risk
• Green Asset Ratio (GAR) Assets
• GAR KPI

The comprehensive nature of this framework creates an urgency for banking institutions to assess their technology infrastructure and make considerations for meeting these reporting requirements going forward. Across lending practices to portfolio holdings, banks will need to keep a close eye on their reporting architecture, ensure proper systems are in place, and deploy technological upgrades that are well-positioned to capture and report on relevant ESG metrics. 

Not only is non-compliance at stake from an enterprise risk perspective, reputational risk is also on the line. Institutions that assess, calibrate, and propel their ESG reporting framework are paving the way for operational success and will serve as leaders among their peers.    

EBA’s Regulatory Impact on the US

It is important to note that while the EBA focuses on standardizing ESG reporting and disclosures primarily for European banks, its reach encompasses both EU and non-EU institutions. 

Even US and other non-EU institutions conducting business within the EU may need to adopt ESG reporting disclosures in accordance with EBA regulations, regardless of their listing status on European exchanges. 

More recently, the U.S. stepped up its stance around ESG, with expected SEC legislation to be formalized that would require public companies to disclose their climate exposures in annual filings and reports. Additionally, proposed rules on human capital and board diversity disclosure are expected in the near future. 

Read more on the potential ramifications of the EU’s ESG reporting standards in our blog, EU Approves ESG Reporting Standards: Impact to the US.

Staying Ahead of the Curve Amidst Ongoing Regulatory Changes

With ongoing shifts to the ESG landscape globally, keeping a pulse on trends and evolving regulation is critical for positioning your firm.  

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