Response to consultation on draft ITS on Pillar disclosures on ESG risk
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• We suggest that the most relevant templates that both serve the purpose of the underlying regulation and are technically feasible for most banks in the internal market are:
o Template 1: the most important one. We recommend a focus on columns a, b, l+m+n (gross amounts), o, v+w+x (gross amounts), and especially the information on absolute financed emissions in column y, and the data-quality in z. This should be the basis for a public insight into the bank’s climate risk profile
o Template 2: All columns are feasible. Maturity insight matters for exit strategies, especially when combined with the financed emissions of each exposure as reported in template 1.
o Template 3: All columns are feasible. Real estate matters for an insight in a society’s progress and the bank’s share in that progress. Column k may need refinement: tonnes CO2e of financed emissions, or emissions of the property, and if the latter, over what period of time?
o Template 4 may be too detailed while not serving risk insights. More feasible and valuable for the purpose of the underlying regulation may be an auditable hotspot analysis with financed emissions as reported in template 1.
o Template 5 could be effective if it were anonymized and followed a hotspot analysis to show the relative exposures in each sub-sector for a given portfolio.
• Although available methodologies are not yet fully comparable among banks, this ITS may improve the comparability by requiring the use of harmonized concepts, such as the GHG Protocol. Public disclosure based on different methodologies and scope will lead to misinterpretation and could expose banks to reputation risks. At least, EBA could require banks to publish their financed emissions based on the GHG Protocol. These financed emissions can serve several elements in the templates to reveal the climate risk profile of the bank.
• Given the dynamics of the relevant data, an assessment of the bank’s climate risk profile would not improve with semi-annual disclosures. In our view, annual disclosures should serve its purpose adequately.
• This template is the most important one. The climate risk profile of the bank would emerge from columns a, b, l+m+n (gross amounts), o, v+w+x (gross amounts), and especially the information on absolute financed emissions in column y, and the data-quality in z. This should be the basis for a public insight into the bank’s climate risk profile.
• Columns f to k, as well as p to u, require a granularity of which we question both the feasibility and the added value for the purpose of pillar 3.
• We may wish to avoid linking climate risk (a long-term risk) with credit risk (a short to medium term risk) in public disclosure, as the interpretations may be misleading.
• Although the use of NACE codes seems logical, gaming with NACE codes may need to be avoided. After all, large companies typically perform more than one activity, and finance is often arranged through the holding company, so if only the main activity is considered we will miss insight into the transition of the company as a whole.
• At a minimum, the GHG emissions financed by financial undertakings in the European Union should be known, to enable science-based target setting and tracking progress towards a zero-carbon economy.
• There are industry-led approaches to measure or estimate and monitor financed emissions following the GHG Protocol and there’s no reason left not to start disclosing financed emissions. For example, the Partnership for Carbon Accounting Financials (PCAF) directly addresses emissions management through its Global GHG Accounting and Reporting Standard for the Financial Industry, which enables financial institutions to measure and disclose the absolute GHG emissions of their loans and investments. The Standard, which is built on and backed by the GHG Protocol, was the response to industry demand for a global, standardized GHG accounting approach. PCAF aims to trigger action through transparency, an effective antidote to greenwashing. Its primary metric for disclosure is absolute financed emissions, expressed in tonnes CO2e.
• Although methodologies for Scope 3 emissions for banks are not fully mature yet, they will only mature if regulators force the sector to use them and improve data-quality, while accepting lower data-quality in the meantime. This is why column z in template 1 matters: this one should show improving quality over time.
• An annual overview of these maturities makes sense.
• If zero carbon in 2050 is the target for everyone, a strategy for reducing emissions based on hot spot analyses with financed emissions would be both more feasible and valuable.
Question 3: Do the respondents agree that the new draft ITS fits the purpose of the underlying regulation?
• We agree that the draft ITS is a good start to fulfill the purpose of Article 449a CRR. Measuring and monitoring financed emissions is the first step towards impact-awareness in banks.• We suggest that the most relevant templates that both serve the purpose of the underlying regulation and are technically feasible for most banks in the internal market are:
o Template 1: the most important one. We recommend a focus on columns a, b, l+m+n (gross amounts), o, v+w+x (gross amounts), and especially the information on absolute financed emissions in column y, and the data-quality in z. This should be the basis for a public insight into the bank’s climate risk profile
o Template 2: All columns are feasible. Maturity insight matters for exit strategies, especially when combined with the financed emissions of each exposure as reported in template 1.
o Template 3: All columns are feasible. Real estate matters for an insight in a society’s progress and the bank’s share in that progress. Column k may need refinement: tonnes CO2e of financed emissions, or emissions of the property, and if the latter, over what period of time?
o Template 4 may be too detailed while not serving risk insights. More feasible and valuable for the purpose of the underlying regulation may be an auditable hotspot analysis with financed emissions as reported in template 1.
o Template 5 could be effective if it were anonymized and followed a hotspot analysis to show the relative exposures in each sub-sector for a given portfolio.
• Although available methodologies are not yet fully comparable among banks, this ITS may improve the comparability by requiring the use of harmonized concepts, such as the GHG Protocol. Public disclosure based on different methodologies and scope will lead to misinterpretation and could expose banks to reputation risks. At least, EBA could require banks to publish their financed emissions based on the GHG Protocol. These financed emissions can serve several elements in the templates to reveal the climate risk profile of the bank.
• Given the dynamics of the relevant data, an assessment of the bank’s climate risk profile would not improve with semi-annual disclosures. In our view, annual disclosures should serve its purpose adequately.
Question 4: Do the respondents agree that the tables with qualitative information proposed capture properly the information that institutions should provide?
We would recommend EBA to require a basic qualitative description of integration of climate risks into strategy and organisation.Question 5: Regarding template 1 – ‘Banking book - Climate change transition risk: Quality of exposures by sector’, do the respondents agree with the proposals in terms of sector and subsector classification included in the rows of the template and the indentification of the most exposed sectors in columns f to k and p to u?
• We appreciate that the EBA chose to confine the disclosure requirements to the most problematic sectors as identified in the taxonomy. Managing what matters most may make a bigger difference than producing information on the comprehensive set of NACE codes.• This template is the most important one. The climate risk profile of the bank would emerge from columns a, b, l+m+n (gross amounts), o, v+w+x (gross amounts), and especially the information on absolute financed emissions in column y, and the data-quality in z. This should be the basis for a public insight into the bank’s climate risk profile.
• Columns f to k, as well as p to u, require a granularity of which we question both the feasibility and the added value for the purpose of pillar 3.
• We may wish to avoid linking climate risk (a long-term risk) with credit risk (a short to medium term risk) in public disclosure, as the interpretations may be misleading.
• Although the use of NACE codes seems logical, gaming with NACE codes may need to be avoided. After all, large companies typically perform more than one activity, and finance is often arranged through the holding company, so if only the main activity is considered we will miss insight into the transition of the company as a whole.
Question 6: Do the respondents agree with the proposal included in templates 1 and 3 to disclose information on scope 3 emissions and with the transitional period proposed?
• The scale of the climate challenge is massive and the role of the financial sector in accelerating the transition to a net-zero emissions economy is essential. Five years after the Paris Climate Agreement was reached in 2015, the largest banks have still invested nearly USD $4 trillion into the fossil fuel sector with no downward trend and no assessment of the climate impact of that finance. This status quo will never lead to Paris alignment, highlighting the importance of GHG accounting, especially in the financial sector.• At a minimum, the GHG emissions financed by financial undertakings in the European Union should be known, to enable science-based target setting and tracking progress towards a zero-carbon economy.
• There are industry-led approaches to measure or estimate and monitor financed emissions following the GHG Protocol and there’s no reason left not to start disclosing financed emissions. For example, the Partnership for Carbon Accounting Financials (PCAF) directly addresses emissions management through its Global GHG Accounting and Reporting Standard for the Financial Industry, which enables financial institutions to measure and disclose the absolute GHG emissions of their loans and investments. The Standard, which is built on and backed by the GHG Protocol, was the response to industry demand for a global, standardized GHG accounting approach. PCAF aims to trigger action through transparency, an effective antidote to greenwashing. Its primary metric for disclosure is absolute financed emissions, expressed in tonnes CO2e.
• Although methodologies for Scope 3 emissions for banks are not fully mature yet, they will only mature if regulators force the sector to use them and improve data-quality, while accepting lower data-quality in the meantime. This is why column z in template 1 matters: this one should show improving quality over time.
Question 7: Do respondents agree that information in terms of maturity buckets by sector proposed in template 2 is relevant to understand the time horizon of when the institution maybe more exposed to climate change transition risk?
• Yes, we agree. A 5-year maturity of an exposure towards a highly polluting company implies lower transition risk than one of 20 years.• An annual overview of these maturities makes sense.
Question 8: Do respondents agree that information in terms of alignment metrics and relative scope 3 emissions proposed in template 4 is relevant to understand and compare the transition risk phased by institutions? What are the respondents’ considerations with regard to the alignment metrics proposed and the sectors that should be covered by this disclosure? Do respondents agree with the transitional period proposed?
• In our view, the added value of template 4 is limited. Although alignment metrics may seem informative to some, in our view a better risk profile for risk management and disclosure purposes would be given with hot spot analyses using financed emissions per sector.Question 9: Regarding the same template 4, what are the respondents’ considerations with respect to the choice of the 2 degrees reference scenario, would respondents opt for a different scenario?
• If any scenario, we would favor always comparing against the 1.5-degree scenario, and none other.• If zero carbon in 2050 is the target for everyone, a strategy for reducing emissions based on hot spot analyses with financed emissions would be both more feasible and valuable.
Question 10: Do respondents agree that information proposed in template 5 is relevant to understand the level of climate change transition risk and that information on exposures towards the most polluting companies is a good complement to the sectorial information included in other templates? Specific feedback is sought on possible alternative formats for the presentation of the information required in template 5. In particular, the EBA seeks feedback on whether aggregate information on exposures towards th
• Template 5 could be effective if it were anonymized and followed a hotspot analysis to show the relative exposures in each sub-sector for a given portfolio. As such, it would support banks to focus their efforts on those clients that need most support for the transition.Upload files
PCAF Letter to EBA - ITS CRR 449a.pdf
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