EU’s bank watchdog unveils tougher ESG reporting rules

Bloomberg

Europe is imposing new requirements on how banks report environmental risks and carbon targets, to give investors a better picture of the threats that climate change poses to the industry.
The European Banking Authority (EDBA) has unveiled a new set of mandatory templates, tables and instructions that banks will have to follow, after a review of environmental, social and governance (ESG) reports found “shortcomings,” the Paris-based EBA said. The new rules give banks far less leeway to cherry pick what to disclose or to use exaggerated language to describe what they’re doing, the regulator said.
“It’s important that stakeholders will soon have access to more information which is fully comparable and more transparent on the ESG issues,” Meri Rimmanen, director of data analytics, reporting and transparency, said in an interview. Disclosure of voluntary targets will signal “the level of ambition of banks’ transition plans towards more
sustainable economy.”
The EBA’s requirements form part of Europe’s broader climate agenda. The bloc last year became first to force asset managers to document their ESG claims. This year, the EU will see the first reports from companies and the financial sector showing how well their businesses line up with a list of environmentally sustainable activities.
The EBA reporting rules, which still need to be approved by the European Commission, aim to provide comparability across bank books, and to show how the fallout from climate change could accelerate, worsening other risks. Lenders will have to provide statistics to show how they are changing to make their businesses align with the Paris Agreement.
Mandated disclosures are designed to bring market pressures to bear, and represent the third pillar in the EU’s framework for regulating the banking industry. The requirements come on top of industrywide capital rules and individual bank assessments.
The new climate reporting requirements, which banks will have to comply with twice yearly, take existing initiatives such as the Task Force on Climate-related Financial Disclosures a step further by establishing templates and granular information, Pilar Gutierrez, head of Pillar 3 disclosures, said.
To eliminate the imprecise language that has characterised some reports, the requirements will include, quantitative information on exposures to carbon-related assets and assets vulnerable to both chronic and acute climate change events and quantitative disclosures on mitigating actions to support counterparties in adaptation to climate change and transition to carbon-neutral economy.
The EBA said it focused on climate in the new requirements because of the “urgency” of global warming and the availability of data. It plans to provide additional instructions on how to account for other risks, including those in the trading book. Banks also will have to describe how they are incorporating ESG into governance structures, strategies and business models, as well as risk management frameworks.