Response to consultation on Implementing Technical Standards on amended disclosure requirements for ESG risks, equity exposures and aggregate exposure to shadow banking entities
1. Do you have any comments on the proposed set of information for Large institutions?
We acknowledge the EBA's aim to clarify and simplify the Pillar III ESG disclosure requirements to avoid duplications, overlaps and inconsistencies, in particular with other existing reporting obligations, as well as eliminate requirements which might not be useful from the prudential perspective. We emphasise that, while this goal is understandable, it should not compromise transparency. Prudential disclosures are crucial for the market to evaluate financial institutions' risk profiles and guide investment decisions. Therefore, incomplete or misleading information resulting from oversimplification could have significant implications.
Focusing on the requirements for large institutions, while we support the EBA's updated templates, we have suggestions for improvements regarding certain templates (see questions 12, 21, 22, 23, and 25). In addition, we also have concerns about the frequency of disclosure and the impact of the Omnibus directive (see question 4).
2. Do you have any comments on the simplified set of information for Other listed institutions and Large subsidiaries?
The EBA opted to simplify the disclosure requirements for other listed institutions and large subsidiaries by exempting them from submitting some templates. Although this approach may be proportionate and relevant for some templates, it also exempts significant institutions from providing highly relevant information from the ESG risk management perspective, particularly regarding the data covered in templates 3 and 4. Omitting these templates means little information will be available on exposure to transition risks, potentially misleading other market participants in their assessment of the ESG risk management of these institutions. Therefore, the EBA should mandate that other listed institutions and large subsidiaries report on templates 3 and 4 (or a simplified version, see questions 21 and 22) on an annual basis.
3. Do you have any comments on the simplified set of information proposed for SNCI and other non-listed institutions?
We recognise the request from SNCIs for simplified standards regarding ESG disclosures. While we acknowledge the importance of this demand from the proportionality perspective, it should not come at the cost of transparency and the quality of information.
First, we support the EBA's simplification of Templates 1 and 5 into Template 1A (see question 15 response for more details). Template 2 focuses on real estate loans by energy performance of collateral. We assume that the energy performance is information already collected by SNCIs to assess collateral value, and it will be easy for them to disclose it in Template 2, or a simplified version. Then, regarding Template 3, we believe it is crucial to include SNCIs in the transition targets and progress reporting, which is essential information on i) institutions’ ESG risk management (covering the requirements of Article 76 and 87a CRD) and ii) institutions’ contribution to mitigating the systemic risk of climate change, i.e. contribution to the transition under the Paris Agreement. As for Template 4, we emphasise that the effort required for its disclosure would be minimal (see question 22) and thus it should remain part of the SNCIs’ ESG disclosure requirements.
4. Do you have any comments on the proposed approach based on materiality principle to reduce the frequency (from semi-annual to annual) of specific templates (qualitative, template 3, and templates 6-10) for large listed institutions?
Public disclosure contributes to the safety and soundness of the banking sector. Providing clear, transparent, and up-to-date information on banks' risk management is essential for ensuring financial stability and enabling informed decision-making by market stakeholders. Over the past few years, there has been a consensus that ESG risks could be material and, hence, could be a source of risk underestimation for market participants. Therefore, we recommend that the EBA maintain a semi-annual reporting frequency on all quantitative templates to ensure up-to-date data.
6. Do you have any comments on the proposed amendments to Table 1 and Table 3?
We support the changes proposed by the EBA.
8. Do you have any comments on the proposed additions and deletions to the sector breakdown?
We strongly support the proposed more granular sector breakdowns. Fossil fuel exposures are subject to the highest transition risk and are the source of physical risk; hence, clear identification and transparency on such exposures are essential from the risk perspective.
Further, we suggest expanding the scope of sectoral exposure reporting to the off-balance sheet exposures given that these exposures may result in significant risks once contingent liabilities for funding commitments associated or derivatives contracts materialise. Our recent analysis of the exposures of the 25 largest EU banks by assets showed that banks have off-balance sheet exposures to the fossil fuel-related sectors which amount to more than 80% of on-balance sheet exposures. As transition-related risks are expected to materialise more in the future, they may lead to deteriorating credit quality of certain borrowers and higher drawdowns on the committed facilities at banks.
Given that off-balance sheet exposures are generally relevant for the determination of banks’ risk profile and the respective capital requirements, including off-balance sheet exposures in the templates appears consistent from the risk perspective.
10. Do you have any views with regards to NACE code K – Telecommunication, computer programming, consulting, computing infrastructure and other information service activities, and in particular K 63 - Computing infrastructure, data processing, hosting and other information service activities, whether these sectors should be rather allocated in the template under section Exposures towards sectors that highly contribute to climate change?
We support the inclusion of the sector represented by NACE code K, particularly sector K 63. Recent data and political declarations related to Artificial Intelligence and digitalisation suggest that emissions from this sector may continue increasing in the coming years. Therefore, considering the substantial impact of this sector, including on factors like greenhouse gas emissions and water scarcity, in Template 1 and Template 1A is essential.
12. Do you have any further comments on Template 1?
Template 1 focuses only on financed emissions, underestimating the possible importance of ESG risks arising from other activities facilitated by large institutions. These activities could account for a huge part of the institution's services toward certain sectors facing high transition risk (such as fossil fuel companies). Moreover, under the new ESG scenario analysis framework, banks will have to consider the impact of climate change on their future business model (the so-called “Climate Resilience Analysis”), which includes facilitated activities. Given this, reporting facilitated emissions at sectoral levels should not represent an additional burden for the banks. In this context, we ask the EBA to include facilitated emissions in Template 1.
We agree that when disclosing ESG risk management, it is crucial to consider high-emitting investments and lending. However, it is also beneficial to have access to information about sustainable investments, as they contribute to the overall ESG risk assessment of the bank by market stakeholders. This is why we highlight the importance of column C ("Of which environmentally sustainable"), which captures this type of information. Emphasising this point, the current Omnibus legislation will not have any impact on the definition of the six Taxonomy objectives, and banks will still be able to rely on a clear definition to label their exposure. Following this idea, we find it useful to also include exposure aligned with the 5 other objectives of taxonomy (CCA, WTR, CE, PPC, BIO), which will lead to a better understanding of environmental risks by market participants. In practice, the EBA could start by incorporating the second objective—“climate change adaptation (CCA)”—and later include the other objectives once technical criteria for them have been established.
15. Do you have any further comments on Template 1A?
Following our response to question 8 & 12, we find it necessary for SNCIs to also disclose off-balance sheet exposure and facilitated activities, as they could account for a huge part of their ESG risks. Like other financial institutions, SNCIs will need to assess climate risks from facilitated activities through the Climate Resilience Analysis exercise, making the disclosure of these exposures both relevant and feasible.
We also recommend that the EBA include a column “Of which environmentally sustainable”—on a voluntary basis—in Template 1A. This would enable SNCIs to highlight the share of their exposure that aligns with taxonomy objectives and provide valuable insights into their transition planning and financing strategies.
20. Do you have any further comments on Template 2?
Since SNCIs already collect data on the energy performance of real estate loans collateral for valuation purposes, we believe reporting this information in Template 2 (or a simplified version) would not be burdensome. Doing so would offer valuable insights to market participants into their real estate portfolios and the transition risks they face.
21. Do you have any comments on Template 3?
We welcome the clarity improvement made by the EBA on Template 3. Disclosing transition indicators is essential to assess the riskiness of banks' current exposure. Including both the “Baseline” metric and the IEA NZE2050 target metric will contribute to improving the transparency of the banks’ risk profiles.
Additionally, it is crucial to maintain comparability and consistency in banks' reporting. Hence, we recommend that the EBA maintain at least a list of high carbon-intensive sectors in Template 3. Banks could then complete this list with sectors relevant to their specific balance sheet.
Given the importance of assessing transition metrics and their possible deviation from global standards, we ask the EBA to also implement a simplified template for other non-large institutions (other listed institutions and SNCIs). This simplified template could focus only on high-emitting carbon-intensive sectors and on the main intensity metric target (columns A to I) without introducing additional targets. Encouraging SNCI to consider and disclose the risks of deviation from international standards should not be viewed as an added burden. Instead, it should be seen as a necessary step, as they must commit to a sustainable transition just like the rest of the banking sector.
22. Do you have any comments with the proposals on Template 4 and the instructions?
The EBA should clarify which exposure should be disclosed in this template: the top 20 most carbon-intensive firms in the world or the top 20 most carbon-intensive firms in the bank's balance sheet. In both cases, facilitated emissions and off-balance sheet exposure should also be included in this template (cf question 12).
1st case Top 20 worldwide: In this case, the EBA could provide the list of the top 20 carbon-intensive firms to ensure consistency across all banks. In this case, there will be no significant burden for other non-large institutions (other listed institutions and SNCIs) to disclose such a template, as it simply involves matching their exposures to this top 20 list.
2nd case Top 20 polluting firms in bank’s portfolio: In this case, to make the template useful for assessing climate transition risk, the EBA should require banks to include GHG intensity metrics (weighted average) corresponding to the exposure. This addition will enable comparability across banks.
23. Do you have any views on whether this template could be improved with some more granular information in the rows, by requesting e.g. split by sector of counterparty or other?
Due to the lack of clarity in the information disclosed in Template 4, we believe that asking for a breakdown by sector of the top 20 carbon-intensive companies will enhance comparability among banks and improve transparency.
25. Do you have any comments on the proposal using NUTS level 3 breakdown for Large institutions and NUTS level 2 for Other listed institutions and Large subsidiaries? Would NUTS level 2 breakdown be sufficient for Large institutions as well?
NUTS level 3 provides for sufficient granularity on climate physical risks, and we support using NUTS level 3 when evaluating these risks. Nevertheless, disclosing only the top 10 NUTS level 3 may not cover a sufficient share of the total exposure for huge international banks given that the surface of NUTS 3 regions is relatively small. Therefore, we support using NUTS level 2 also for large institutions for disclosure purposes.