The EBA has published binding standards and instructions that apply for institutions’ Pillar III ESG disclosures. The existing NACE concept is used in these disclosures. By way of Annex II to EBA/ITS/2022/01, in paragraph 8 for the section “Instructions for disclosure of ESG risks”, for ‘Template 1 – Banking book – Climate change transition risk: Quality of exposures by sector’, the instruction starts with “The counterparty NACE sector allocation shall be based on the nature of the immediate counterparty.” This we believe is consistent with the applicable instruction from Annex V for FINREP (to the ITS for Supervisory reporting, published as Regulation 2021/451).

The Annex II instructions for ESG Pillar III disclosures (§8) however add additional instruction, that in situations where the immediate counterparty is a holding company, that institutions shall consider the NACE sector of the specific obligor under the holding company which receives the funding (i.e. the specific subsidiary of the holding company in question) rather than that of the holding company itself. The same paragraph 8 also instructs that in case the immediate counterparty of the institution is an SPV, that the institution should determine the applicable NACE sector for disclosure purposes (at least in Template 1) based on the NACE sector associated with the economic activity of the parent company of the SPV.

In FINREP, specifically in template F06.01, a breakdown of non-trading loans and advances to ‘non-financial corporations’ by NACE codes has to be given. The applicable Annex V Part 1.43-44 indicates that FINREP uses the immediate counterparty concept. Annex V Part 2.90-92 further adds that it is about the principal activity of the counterparty and via 2.92 provides additional instruction that “..loans and advances to non-financial corporations which engage in financial or insurance activities” shall be reported in sector ‘K – Financial and Insurance activities’. It does not contain the additional instruction for holding companies and SPVs.

Given that there has not been an amendment of the applicable instructions for FINREP, we believe that current instructions that apply for Pillar III ESG disclosures will therefore not align with the reporting instructions that apply for FINREP F06.01 and foresee differences in NACE classification between Pillar III ESG disclosures and FINREP template F06.01. Based on the EBA mapping tool for Pillar III, the figures reported in F06.01 are however also used in Pillar III template CQ5 (‘Credit quality of loans and advances to non-financial corporations by industry’), which would mean there are effectively two different NACE instructions within the overall set of Pillar III disclosures.

The instructions for FINREP could therefore benefit from further guidance, specifically on the above and also to what is expected to be reported in Section K from template F06.01. To clarify, based on the combination of ‘NACE Rev. 2’ and ESA 2010, it would appear that if the principal activity of the immediate counterparty is ‘activities of head offices’ (NACE 7010), then it classifies as Section M ‘Professional, Scientific and Technical Activities’. Depending on the types of the subsidiaries (of the head office), e.g. if all or most of these are financial corporations, then it would be considered a financial auxiliary (S.126) and as such would not be a ‘non-financial corporation’ for FINREP purposes (meaning it would not be disclosed in F06.01 at all). If the immediate counterparty is a “true” holding company, i.e. it does not undertake any management activities, then ESA 2010 indicates it classifies as a ‘captive financial institution’ (S.127). A ‘captive financial institution’ also does not classify as ‘non-financial corporation’ and would therefore also not be included in FINREP template F06.01.

Given that FINREP F06.01 is only to be presented for the FINREP counterparty sector (based on ESA 2010) ‘non-financial corporations’. Considering the above observations and looking at the other NACE codes included in Section K (in ‘NACE Rev. 2’). Is the correct interpretation of Annex V Part 2.92 then that this specific paragraph instructs to “overrule” the principal activity instruction from ‘NACE Rev. 2’ and Annex V Part 2.90? Meaning that for an immediate counterparty, that performs multiple activities, the principal activity of which results in a ‘non-financial corporation’ classification (it appears likely that if the principal activity of an immediate counterparty is one from Section K, that the counterparty would not classify as a ‘non-financial corporation), with however one of the other activities classifying as Section K ‘Financial and Insurance Activities’, that gross carrying towards that counterparty is expected be reported in FINREP F06.01 Section K?