Response to consultation on draft ITS on Pillar disclosures on ESG risk
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As a specific example, the ITS for Template 1 requires exposure amounts for “non-financial corporates”, though “non-financial corporates” is not explicitly defined. This may create a scenario where Institution “A” interprets the perimeter differently than Institutions “B”. To support this point, we can point to the ITS for CoRep, which re-directs the Institutions directly to art. 112 of the CRR for the definition of regulatory classifications.
Additionally, the EBA may wish to more explicitly describe the timeline to adopt the new requirements. Our interpretation of Paragraph 18 is that the first disclosure of this information is to be done in 2023 (with the Pillar 3 deadline) using Dec. 2022 data; the disclosure is performed only once in 2023; from 2024 and onwards, the disclosure is semi-annual.
While a “free format” may hinder comparability, the mandate of CRR art. 449a requires qualitative information that, at the moment, cannot be expressed in quantitative terms. There may be opportunities over the course of the current decade to establish a fixed format for some information.
It is worth noting, however, that the Sector/Sub-Sector breakdown does not allow for a distinction of firms that may be classified among the “most exposed sectors”, yet are actively contributing (in a positive way) to Sustainable Development Goals. We can point to organizations such as mining companies that produce lithium for batteries, construction firms specialized in energy efficient buildings, or automotive firms which produce only EVs. The figures of these likely “green” firms will be grouped together with other comparatively “brown” firms. Though this may be a limitation of the current statistical classification framework, the EBA may wish to distinguish between what the Institution considers to be green/brown exposures.
With specific regards to Template 3, the requested data is similar to what some National Central Banks and pilot programs, such as the Energy Efficient Mortgage Initiative, are currently collecting from Institutions. From our perspective, these current initiatives put into focus two main challenges:
1. Institutions may be over burdened by the cost of compliance, the lack of operational processes and quality data. The transition period may help to address these issues, and is therefore welcomed.
2. Institutions that already have operational processes in place to collect and store energy standards data (EPC grades) for Real-Estate have encountered challenges with classification by region (even within the same EU country) and over time. We observe, for example, that the NBB in Belgium has emitted requirements to collect the energy efficiency label for Real-Estate with deadlines differentiated by geographical region, with some Real-Estate exempt from this requirement based on its construction date. In other words, comparability for Template 3 may not be ensured.
It is worth noting that climate change affects different regions distinctly: where possible, Institutions may need to adapt their reference scenario accordingly to match their local needs to better gauge their exposures to physical risks. To this point, as mentioned in the ECB’s preliminary climate change stress test results, Southern Europe is more susceptible to heatwave and heat-stress while Northern Europe is more susceptible to flooding risk. For this reason, the EBA may wish to allow Institutions to disclose one additional reference scenario that matches their local risk assessments.
With regards to external data sources, many data firms provide such info at the Group or Holding level. This is in direct contrast to the ITS requirement of template 5, which asks for the borrower data. For this reason, the EBA may want to consider to structure this table from the perspective of the group or holding of the borrower. This may help address the core objective of promoting Sustainability via the expanded inclusion the parent companies which control in sense the borrower's activities. However, this logic would pose possible misalignment with the other templates in terms of Sector breakdown as the group or holding may have different NACE codes than the borrower.
Lastly, per our understanding of the ITS, the column F of this template may decrease the level of comparability among the respondent Institutions as each Institution can decide whether they want to report the top 20 list based on either world / EU / member state breakdown.
Question 1: Are the instructions, tables and templates clear to the respondents?
While the format of the consultation is clear, namely by leveraging the ITS / DPM approach for CoRep and FinRep, the ITS lacks some specific references to the CRR or to other relevant regulation, to ensure the precise understanding among Institutions.As a specific example, the ITS for Template 1 requires exposure amounts for “non-financial corporates”, though “non-financial corporates” is not explicitly defined. This may create a scenario where Institution “A” interprets the perimeter differently than Institutions “B”. To support this point, we can point to the ITS for CoRep, which re-directs the Institutions directly to art. 112 of the CRR for the definition of regulatory classifications.
Additionally, the EBA may wish to more explicitly describe the timeline to adopt the new requirements. Our interpretation of Paragraph 18 is that the first disclosure of this information is to be done in 2023 (with the Pillar 3 deadline) using Dec. 2022 data; the disclosure is performed only once in 2023; from 2024 and onwards, the disclosure is semi-annual.
Question 2: Do the respondents identify any discrepancies between these tables, templates and instructions and the disclosure requirements set out in the underlying regulation?
We note a small discrepancy between the logic of the Sector driven templates and Template 3. Template 3 requires Residential and Commercial Real-Estate, though Residential Real-Estate, which is the majority of Real-Estate exposures in Europe, is a Retail exposure. As Residential Real-Estate is a Retail exposure, it will not be included in the “non-financial corporates” perimeter, nor will it be associated to a Sector.Question 3: Do the respondents agree that the new draft ITS fits the purpose of the underlying regulation?
As the EBA draft document notes, the production of these disclosures is part of the larger European and international objective to transition towards a sustainable economy. Though Institutions may face significant challenges to produce these disclosures, the underlying data, processes, and concepts are part of the larger regulatory/supervisory framework in Europe to meet sustainability objectives, and therefore the disclosures are a functional part of necessary change. Limiting the scope of the disclosures to non-financial corporates may help facilitate the adoption of the new disclosure requirements by Institutions, though this reduced scope is not explicitly defined in the underlying regulation.Question 4: Do the respondents agree that the tables with qualitative information proposed capture properly the information that institutions should provide?
The majority of the proposed qualitative information is in line with typical Corporate Disclosures and/or CSR Reports, so the proposal seems logical and therefore useful to the public and analysts.While a “free format” may hinder comparability, the mandate of CRR art. 449a requires qualitative information that, at the moment, cannot be expressed in quantitative terms. There may be opportunities over the course of the current decade to establish a fixed format for some information.
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?
The objective of Template 1, and the other corresponding templates with the Sector/Sub-Sector breakdown, should be to allow the public to recognize the concentration of potential transition risk. By triangulating columns F to K and P to U (according to Article 5 of Climate Benchmark Standards Regulation), it is possible for the public to have a first level understanding of the concentration of potential transition risk.It is worth noting, however, that the Sector/Sub-Sector breakdown does not allow for a distinction of firms that may be classified among the “most exposed sectors”, yet are actively contributing (in a positive way) to Sustainable Development Goals. We can point to organizations such as mining companies that produce lithium for batteries, construction firms specialized in energy efficient buildings, or automotive firms which produce only EVs. The figures of these likely “green” firms will be grouped together with other comparatively “brown” firms. Though this may be a limitation of the current statistical classification framework, the EBA may wish to distinguish between what the Institution considers to be green/brown exposures.
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 inclusion of Scope 3 emissions is essential to help the public assess potential transition risk, and is therefore relevant in both Template 1 and 3.With specific regards to Template 3, the requested data is similar to what some National Central Banks and pilot programs, such as the Energy Efficient Mortgage Initiative, are currently collecting from Institutions. From our perspective, these current initiatives put into focus two main challenges:
1. Institutions may be over burdened by the cost of compliance, the lack of operational processes and quality data. The transition period may help to address these issues, and is therefore welcomed.
2. Institutions that already have operational processes in place to collect and store energy standards data (EPC grades) for Real-Estate have encountered challenges with classification by region (even within the same EU country) and over time. We observe, for example, that the NBB in Belgium has emitted requirements to collect the energy efficiency label for Real-Estate with deadlines differentiated by geographical region, with some Real-Estate exempt from this requirement based on its construction date. In other words, comparability for Template 3 may not be ensured.
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?
We agree that disclosing maturity information is essential to help the public ascertain the perceived forward looking risks, particularly during the present economic transition period. As the goal of this template is indeed to represent the time horizon of the risk, the template may be more effective in its goal if the exposure were represented with a logic similar to IFRS9 Impairment principles, i.e. represented by the amount of exposure to be reimbursed for each maturity bucket based on contractual installments. Under the current ITS, the public could only assume that the entirety of the exposure is paid in full at the final installment date. A revised logic may allow the public to understand more effectively the risk posed to the Institution over time.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?
NAQuestion 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?
We observe that many Institutions which lack analytical and sophisticated computational resources are currently only using 2 degrees as a reference scenario. Therefore, the 2 degree reference scenario may serve as a useful baseline.It is worth noting that climate change affects different regions distinctly: where possible, Institutions may need to adapt their reference scenario accordingly to match their local needs to better gauge their exposures to physical risks. To this point, as mentioned in the ECB’s preliminary climate change stress test results, Southern Europe is more susceptible to heatwave and heat-stress while Northern Europe is more susceptible to flooding risk. For this reason, the EBA may wish to allow Institutions to disclose one additional reference scenario that matches their local risk assessments.
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
From a legal perspective, Institutions may be liable for the disclosure of incorrect information of borrowers present in the top 20 list, and so it may be ill-advised for Institutions to use external data that is not explicitly validated by a European regulatory body. A given Institution may need to establish a specific contractual agreement with the borrower to disclose such information, which may have the adverse effect (with respect to Sustainability objectives) of these borrower requesting to invoke art. 432 of the CRR.With regards to external data sources, many data firms provide such info at the Group or Holding level. This is in direct contrast to the ITS requirement of template 5, which asks for the borrower data. For this reason, the EBA may want to consider to structure this table from the perspective of the group or holding of the borrower. This may help address the core objective of promoting Sustainability via the expanded inclusion the parent companies which control in sense the borrower's activities. However, this logic would pose possible misalignment with the other templates in terms of Sector breakdown as the group or holding may have different NACE codes than the borrower.
Lastly, per our understanding of the ITS, the column F of this template may decrease the level of comparability among the respondent Institutions as each Institution can decide whether they want to report the top 20 list based on either world / EU / member state breakdown.