EBA consultation on prudential disclosures on ESG risks
The EU Capital Requirements Regulation (CRR) includes a new requirement for large institutions with listed securities to disclose prudential information on environmental, social and governance (“ESG”) risks, including climate change transition and physical risks.
These disclosure requirements will apply from June 2022 on an annual basis for the first year and then biannually. This represents a significant development in the existing Pillar 3 disclosure regime.
The EBA is mandated under CRR to develop draft implementing technical standards (ITS) specifying these disclosure requirements and has now released a comprehensive consultation paper under this mandate which sets out the templates for ESG disclosures, including:
- qualitative disclosures on ESG risks;
- quantitative disclosures on climate change transition risk;
- quantitative disclosures on climate change physical risk; and
- quantitative information and KPIs on climate change mitigating measures, including the green asset ratio (“GAR”) on taxonomy-aligned activities and other mitigating actions.
Summary of EBA’s proposed approach
The EBA is proposing a staged approach starting with quantitative information on climate change related risks, including transition and physical risks, the implementation of a GAR on EU taxonomy-aligned activities (a classification of sustainable activities aligned with the Paris Agreement under the EU Taxonomy Regulation), as well as quantitative information on other mitigating actions, and qualitative disclosures for ESG risks. The EBA also provides transitional relief (which in relation to certain disclosable items will be granted until 2024).
In addition, the EBA has produced a summary of key disclosures and relevant examples:
The EBA discusses in some detail the interaction of the EBA’s prudential disclosures under CRR and the Investment Firms Review with other regulatory initiatives in respect of ESG disclosures such as the:Pillar 3 as part of a bigger puzzle
- Non-Financial Reporting Directive (“NFRD”), which applies to large public interest entities with more than 500 employees (such as large listed companies, banks and insurers) and requires disclosures on ESG and diversity information;
- Taxonomy Regulation, which applies to large public interest entities subject to the NFRD and defines environmentally sustainable activities (aligned with the Paris Agreement); and
- Sustainable Finance Disclosure Regulation (“SFDR”), which applies to financial market participants including financial advisers and financial firms offering investment services, and relates to financial advice and investment activities.