Response to consultation on draft ITS on Pillar disclosures on ESG risk
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Going beyond countries, physical risk exposure is best assessed at the facility level. Recognising the potential reporting burden for banks, we would welcome an approach that considers a detailed breakdown of exposure at the facility level (e.g. the percentage of facilities exposed to relevant hazards) for the top 20 (or more) most exposed entities across the bank’s portfolios.
The hazard table from the EU Taxonomy does not align with the IPCC hazard breakdown, which could represent a source of confusion and added burden for banks. The hazard table referenced combines hazards under the acute/chronic heading or within each category that are fundamentally different in terms of their physical drivers, manifestation and trends (e.g. sea level rise and water stress are unrelated yet referenced under the same broad ‘water-related’ header). In addition, the reference table establishes arbitrary differences between closely related phenomena (e.g. water stress and drought, respectively labeled chronic and acute but without clear difference by event duration or threshold), creating additional burden for companies without adding value in terms of the risk assessment. Instead, we would welcome the incorporation and/or explicit referencing of the established, peer-reviewed hazard table published by the IPCC (IPCC WG1 AR5 Summary for Policy Makers, Table SPM1 pg. 7). This contains a simple set of globally relevant and material climate hazards, including heat stress, extreme precipitation and floods, drought, cyclones, wind storms and sea level rise.
Finally, the scope of the proposals could be expanded to require forward-looking probability of default (PD) estimates for companies based on their physical risks, as included in the transition risk templates, to ensure banks understand and disclose the credit risk implications of the physical risk exposure of their portfolios.
Question 4: Do the respondents agree that the tables with qualitative information proposed capture properly the information that institutions should provide?
Yes. In general, the tables for qualitative information thoroughly capture information institutions should provide.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?
While we broadly agree with the sector and subsector proposals, we believe the scope of sectors could be expanded to explicitly include building materials and refining and marketing in the oil and gas sector.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?
Yes. However, the proposals could also consider the requirement to disclose scope 1 and 2 emissions in the near term, as such data is readily available for companies across sectors.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. Time horizon is relevant, and the buckets proposed are appropriate.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?
Yes. We agree with the temperature alignment metrics and relative scope 3 emissions, as well as the transitional period proposed. The proposals may wish to consider airlines as an additional sector, with g CO2/RTK (Revenue tonne kilometre [passengers and freight]) as a key metric.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?
We believe that the proposals could also consider the relevance for banks of the International Energy Agency’s new Net Zero by 2050 scenario released in May 2021. In addition, we would welcome regular updates of the reference scenario, such as on an annual basis or when new IEA scenarios become available. This would help reflect changes in historical emissions and changes in technology and policy.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
The strategies and relative performance of high-emitting entities in reducing GHG emissions can vary considerably. As such, we caution that aggregation of the top 5 emitters would risk masking significant differences inherent within banks’ exposure by failing to provide sufficient granularity on individual counterparties and their respective climate governance track records. Disclosures at the entity level for the top 20 most exposed, coupled with indicators on how the counterparties are managing transition risk, could be considered as an alternative.Question 12: Do respondents agree that the information included in template 7 is appropriate to understand how and to what extent the institution may be exposed to climate change physical risk and that the differentiation between a simplified and an extended template is necessary in the short/medium term?
The physical impacts of climate change are primarily affected by counterparty location (exposure), and secondarily by the counterparty’s sector (sensitivity). Reporting by sector alone fails to capture the potential geographic exposure and concentration in a bank’s portfolio and may not provide adequate transparency into its vulnerability to physical impacts of climate change. As such, the EBA may consider either a table by country, or country and high-level sector roll-ups (such as NACE 1 or 2).Going beyond countries, physical risk exposure is best assessed at the facility level. Recognising the potential reporting burden for banks, we would welcome an approach that considers a detailed breakdown of exposure at the facility level (e.g. the percentage of facilities exposed to relevant hazards) for the top 20 (or more) most exposed entities across the bank’s portfolios.
The hazard table from the EU Taxonomy does not align with the IPCC hazard breakdown, which could represent a source of confusion and added burden for banks. The hazard table referenced combines hazards under the acute/chronic heading or within each category that are fundamentally different in terms of their physical drivers, manifestation and trends (e.g. sea level rise and water stress are unrelated yet referenced under the same broad ‘water-related’ header). In addition, the reference table establishes arbitrary differences between closely related phenomena (e.g. water stress and drought, respectively labeled chronic and acute but without clear difference by event duration or threshold), creating additional burden for companies without adding value in terms of the risk assessment. Instead, we would welcome the incorporation and/or explicit referencing of the established, peer-reviewed hazard table published by the IPCC (IPCC WG1 AR5 Summary for Policy Makers, Table SPM1 pg. 7). This contains a simple set of globally relevant and material climate hazards, including heat stress, extreme precipitation and floods, drought, cyclones, wind storms and sea level rise.
Finally, the scope of the proposals could be expanded to require forward-looking probability of default (PD) estimates for companies based on their physical risks, as included in the transition risk templates, to ensure banks understand and disclose the credit risk implications of the physical risk exposure of their portfolios.