The final draft implementing technical standards (ITS) on Pillar 3 disclosures on Environmental, Social and Governance (ESG) risks has been published by the European Banking Authority (EBA). The final draft ITS has shown comparable disclosures concerning how climate change may aggravate other risks within institutions’ balance sheets, how institutions are mitigating those risks, and their ratios, including the GAR, on exposures financing taxonomy-aligned activities, such as those consistent with the Paris agreement goals.
Disclosure of information on ESG risks is a key element to endorse market discipline, giving stakeholders chance to assess banks’ ESG related perils and sustainable finance strategy. The EBA ESG Pillar 3 package will assist in analysing shortcomings of institutions’ current ESG disclosures at EU level by defining obligatory and consistent disclosure requirements, including granular templates, tables and associated instructions. Additional best practices will be established at an international level.
In agreement with the prerequisites laid down in the Capital Requirements Regulation (CRR), the draft ITS set out comparable quantitative disclosures on climate-change related transition and physical risks, including information on exposures towards carbon related assets and assets subject to chronic and acute climate change events. They also include quantitative disclosures on institutions’ mitigating actions supporting their counterparties in the transition to a carbon neutral economy as well, the adaptation to climate change Moreover, they include KPIs on institutions’ assets financing activities that are environmentally sustainable according to the EU taxonomy (GAR and BTAR), such as those consistent with the European Green Deal and the Paris agreement goals.
Lastly, the final draft ITS delivers qualitative information on how institutions are entrenching ESG considerations in their governance, business model, strategy and risk management framework.
The EBA has incorporated proportionality methods that should facilitate institutions’ disclosures, including transitional periods and the use of estimates.
Legal basis and background
Article 434a of the Capital Requirements Regulation (CRR) instructs the EBA to expand draft implementing technical standards specifying uniform disclosure formats, and associated instructions in accordance with which the disclosures needed in Part eight of the CRR shall be made. Those uniform formats shall express sufficiently comprehensive and comparable data for users of that information to measure the risk profiles of institutions.
The ITS will amend the final draft ITS on institutions’ public disclosures with the strategic objective of defining a single, comprehensive Pillar 3 framework under the CRR that should incorporate all the relevant Pillar 3 disclosure requirements. This will facilitate institutions’ implementation and enhance clarity for users of such information, as expressed in the EBA Pillar 3 roadmap.
When developing these standards, the EBA has successfully developed the Financial Stability Board Task Force on Climate-related Financial Disclosures (FSB-TCFD) recommendations, the Commission’s non-binding guidelines on climate-change reporting, and on EU Taxonomy.