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European Association of Public Banks (EAPB)

The EAPB welcomes the opportunity to comment on the draft ITS on prudential disclosures on ESG risks.

First of all, the level of detail of the information requested in the draft ITS is very high. The granularity of the templates corresponds more to that of a comprehensive reporting sheet than that of a disclosure template. Against the background of the half-yearly disclosure frequency and with regard to the cost-benefit aspects, both the granularity and the scope of the EBA templates do not seem appropriate.

In addition, we consider the double disclosure of templates in two external reports of the institutions to be superfluous (templates 8 and 9 according to EBA Pillar 3 ITS and templates 1 and 3 according to EBA advice on Art. 8 Taxonomy Regulation).

We support that proxies can be used in a transitional phase. The EBA should clarify that this will also be possible after phasing in for certain asset categories.

The EAPB would like to submit comments and questions on the following templates as well:

- Template 1: For “Of which exposures towards companies excluded from EU Paris-aligned Benchmarks”, is a company level assessment expected for article 12.1 (g) GHG intensity and for 12.2. significantly harming one of environmental objectives? Is the transitional period applied for this reporting requirement too?

- Template 1: What is the rationale for only including “of which environmentally sustainable” for CCM objective, and not for CCA?

- With regard to risk management, we consider the requirements, the tables and the underlying templates to be conditionally suitable for meeting the requirements of Article 435 CRR in conjunction with Article 449a CRR. In our opinion, they would cause enormous costs in the provision of information and might not reflect the different ways in which the business models of significant institutions are affected by ESG risks. The intended scope is very granular, so it has to be feared that the market participants will be flooded with disclosed information , some of which is not even relevant for their capital market decisions. We also fear inconsistencies with various comparable requirements of other standard setters (e.g. disclosure based on the Taxonomy Regulation, the Disclosure regarding investment advice and the non-financial statement), which are all still under development.

- A direct comparison of the Draft ITS with the ECB supervisory guide on climate-related and environmental risks (as of November 2020) also shows that the Draft ITS is also far more granular and descriptive in the requirement of risk management data to be disclosed. We do not think that the concept of proportionality is addressed adequately. For example, there may be large institutions for which ESG risks are not material. In this case – and this approach would be analogous to the recommendations of the ECB Guide – the scope of disclosure should be significantly reduced. We also express this with a view to a possible later explicit or implicit expectation of the supervisory authority that similar information should also be disclosed by less large or complex significant institutions.

- Template 5: It seems unclear whether the institution may choose any one of the three levels (world/EU/member state) and report exposures to counterparties in that list, or whether the list may (or should) be populated by companies from varying levels (some counterparties that are top emitting at world level and at the same time some counterparties that are only top emitting in the EU or at member state level)?

- Template 8: It is unclear, how to assess “Of which: towards taxonomy relevant sectors” for liquidity portfolio where issuer of a green bond is a financial institution. Should the allocation and “of which: environmentally sustainable” assessment base on the sectors the bond has invested in or should the assessment be made based on the issuer’s sector and on the proportion of the turnover derived from products or services associated with economic activities that qualify as environmentally sustainable under Articles 3 of that Regulation?

- Furthermore, the EAPB would like to point out that a large number of EAPB members have liquidity portfolios which to a large degree contains exposures towards sovereigns and local authorities (regions and municipalities) who are not covered by disclosure requirements under the NFRD/draft CSRD/Taxonomy regulation Art. 8. The instructions pt. 24 states that: “When the counterparty is not subject to Article 8 of Regulation (EU) 2020/852, for the calculation of the percentage of taxonomy-aligned exposures, credit institutions shall, on a best effort basis, collect information form their counterparties bilaterally through the regular credit review and monitoring process. Only if the counterparty is not able to provide the relevant data, credit institutions shall make use of the coefficients proposed by independent authorities, e.g. the JRC, at sectoral level, Member State level or aggregate level for EU sectors, in order to proxy for the objective of climate change mitigation. In this case, credit institutions shall estimate and disclose the information, and explain the proxies applied”. For the same reasons as discussed in EBA’s assessment of options 6a and 6b concerning sovereign exposures, the nature of the entities and their activities are not fit for taxonomy assessments, nor are they covered by the JRC proxies. The feasibility of providing detailed reporting related to liquidity portfolio exposures towards these types of counterparties is thus severely limited.

- Sovereign exposures (defined in this ITS according to general governments as per FINREP) are out of scope, whereas the non-financial corporations (per definition excluded from the “general government” sector) fully owned by municipalities and/or guaranteed by municipalities are in scope. As the (local) government still bears the ultimate risk for these exposures, the rationale for requiring the assessment purely based on the counterparty sector is unclear. In conclusion, we would appreciate clarification of whether the sovereign exposures only comprises the general governments as per FINREP, or whether the treatment should base on the ultimate risk taker. Their exclusion from the scope of reporting would lead to biased reporting. However, their inclusion in the scope should be subject to adopting AGAR (taxonomy alignment) as KPI for banks for disclosure purposes, see our response to question 3 below, and subject to the qualifications mentioned there.
- Template 3-5: The scope of the template is unclear: Should the templates only include non-financial corporations consistently with templates 1-2?
- We welcome the clarification that 31 December 2022 will be considered as the first mandatory reporting date. In addition, we consider the inclusion of the ESG-related EBA regulations in the overarching Pillar 3 ITS as well as sequential and phase-in approaches including transitional periods to be reasonable. In our view, however, the draft ITS only partially fulfils the underlying regulation. The intended goal could be achieved with significantly less effort. More than that, Pillar 3 should not create originally / substantially new requirements, but report on what institutions are already obliged to do anyway in Pillar 1 or 2. For example, to fulfil the purpose of the CRR requirements, it would be sufficient to report only the first level of the NACE code. Information on Stage 2 exposures, PDs and risk provisions should also not be required, as this would only provide limited information on the extent to which the economic activities of the institutions can be qualified as sustainable. In addition, duplications or overlaps with the reporting according to Art. 8 of the Taxonomy Regulation should be avoided.

Template 8 (Assets for the calculation of the Green Asset Ratio, GAR) and template 9 (GAR KPI):

- The EAPB advocates a split of the main indicator Green Asset Ratio (GAR) into GAR 1 / CGAR (full Taxonomy Compliance) and GAR 2 / AGAR (Taxonomy Alignment). Thus, AGAR should only focus on alignment with the ‘significant contribution’ taxonomy criteria. Considering DNSH criteria (do no significant harm) or minimum social safeguards (MSS) in the GAR is strongly reducing the comparability of the KPI due to their foremost qualitative character. The comparability of the KPI is fundamental. We are therefore convinced that the proposed AGAR better serves the stakeholder interests. The majority of loans of EU-banks are granted to EU counterparties for which EU environmental and social regulation applies. Thus, implicitly, approximately 70 percent of the DNSH-criteria and MSS are already regulated. Accordingly, assessment methods for CO2 calculation should be clearly defined within the Level 2 Act without allowing alternative options to further decrease comparability. AGAR should be an alternative KPI for institutions with a major part of their exposures towards entities outside the scope of NFRD/CSRD/taxonomy regulation disclosure requirements. Such institutions should not also be required to report CGAR.

- For many EAPB members, the ITS fully leaning on FINREP counterparty sector allocation, might not fit the purpose of the regulation.

- Presently, the only “general government” assets that are eligible for the GAR calculation are house financing to local governments. We understand that such financing has been singled out for inclusion because assessment of taxonomy compliance will be fairly simple based on EPC labels, but presumably also because the use of proceeds is known (and they would therefore presumably fall within the scope of treatment as special purpose lending exposures according to pt. 59 b of the consultation paper).

- The EAPB generally agrees with EBA’s assessment of options 6a and 6b concerning sovereign exposures. Demonstrating taxonomy compliance on a project level for sovereign exposures, including exposures to local and regional authorities and public sector entities, is very challenging as most counterparties will be exempted from the reporting requirements under the taxonomy regulation, NFRD/CSRD, etc. The EAPB further considers that it will be virtually impossible to assess the environmental sustainability according to the principles of pt. 59 b of the consultation paper for sovereign exposures that constitutes general purpose lending/funding. The EAPB therefore agrees with EBA that general purpose lending/funding to the “general government” sector should be excluded from the scope of the GAR calculations (and hence be defined as not eligible assets).

- As the case of housing loans to municipalities demonstrate, however, it would be possible to include special purpose lending exposures to the “general government” sector in the scope of the GAR calculation, and EAPB would therefore argue that the scope of the calculations should be extended to special purpose lending exposures provided that the EAPB proposal for an AGAR alternative KPI as set out above is adopted. For special purpose lending exposures, detailed information will be much more readily available. The EAPB would further point out that whilst EBA in its reasoning makes reference to the fact that sovereign exposures as a share of total financial assets was limited to 12.2 % in Q3 2020, for many EAPB members with a public policy mandate, a major part of lending for environmentally sustainable activities, including for energy and ecological activity as defined by the taxonomy, will constitute sovereign exposures, either in the form of financing directly to local or regional authorities or channeled via local public enterprises classified in the “general government” sector. The ITS fully leaning on FINREP counterparty sector allocation would therefore exclude most of the environmentally sustainable activities of many EAPB members (and include only housing loans to municipalities). This could potentially give banks with a public policy mandate with an artificially low GAR that might disadvantage them disproportionately in relations with investors and other stakeholders. The EAPB believes that this might not fit the purpose of the regulation. The EAPB therefore advocates that AGAR should be adopted as an alternative and that special purpose lending exposures (including green, social and other labelled lending) to local and regional authorities and public sector entities should be defined as eligible assets for the AGAR calculation, and institutions should be able to include those exposures in the AGAR calculation on an optional basis. This should be subject to the qualification that information and data necessary for the AGAR calculation will be readily available for banks, and that a phase in period until 2025 should apply to special purpose lending exposures to such counterparties.

- As regards transition period for the present stock of loans, it will be very difficult to collect data even after the transition period, as discussions with a given counterparty take place mainly before the loan contract signature. We advocate for the possibility to continue to use proxies, beyond the transition period, for the stock of loans signed before the Taxonomy comes into effect.

- As regards SMEs and other non-NFRD corporates, even after the transition period their reporting capacity will be the same. Although the upcoming replacement of the NFRD will extend its scope of application, it can be reasonably expected that the new CSRD provisions will be proportionate. We therefore advocate to develop an alternative method for use beyond the end of the transition period; e.g. for non-NFRD/CSRD counterparts the AGAR (GAR with Taxonomy Alignment only) shall apply after the transition period.
The qualitative disclosure requirements for ESG as risk driver seem to be too extensive even compared to the CRR requirements for the actually established risk categories.

We would welcome it if the tables on social and governance risks were postponed for disclosure at least until a corresponding taxonomy is finally available. Otherwise, it will be difficult to achieve comparability between the institutions. Stakeholders can find corresponding information on social and governance aspects in the NFRD reporting. A duplication of the information does not appear to be expedient.
- Of which exposures towards other carbon-intensive sectors**: What is the information added for reporting these sectors on in addition to the row allocation, where the same NACE sub-sectors are already reported?

- The data required is largely based on FINREP. At the same time, the average probability of default is to be reported. However, this risk parameter is not reported in FINREP. Combining the data from different data regimes is extremely time-consuming. In addition, the added value of the presentation of the average probability of default (PD) is unclear to us. PD typically refers to a one-year horizon and is based on a variety of parameters, which could include information on ESG factors in the future. Green assets are neither per se low-risk nor per se high-risk. Here, it depends on the individual case and the framework conditions. Since the PD describes the overall credit default risk based on the creditworthiness of the borrower or counterparty and refers to a short-term risk horizon, the informative value in a reporting system on sustainability issues is very limited. We therefore recommend that the average PD should not be disclosed.
The transitional provisions should not be placed in Annex II, but in the main text of the ITS (e.g. in Art. 18a). We also request a postponement of the initial disclosure of Scope 3 data by at least 1 year (from June 2024 at least to June 2025) because the IT data process required for this must first be established in sufficient intensity and the focus is currently on the implementation of other new comprehensive sustainability-related EU requirements.
- The transitional provisions should not be placed in Annex II, but in the main text of the ITS (e.g. in Art. 18a). It would be sufficient to report only the first level of the NACE code. In addition, we are convinced that the procurement of information, especially for existing clients (stock), cannot be fully ensured in the short or medium term for the NACE codes mentioned. Here, transitional solutions and, if necessary, threshold values for disclosures should be indicated.

- Disclosures are required according to Annex I at gross book values, according to Annex II at fair value. We consider this to be inconsistent and, in view of the different accounting principles, consider the consideration of gross book values to be appropriate.
The requirements should be aligned with Pillar 2.
- At present, it cannot be reliably estimated whether or at what point the granularity of the extended template 7.2 can be implemented. We therefore propose to finalize only template 7.1 in the first version of the P3 ESG ITS. In the course of the further development of the taxonomy and depending on the requirements in Pillar 2, template 7.2 could be put out for consultation again in the future, already announced revision or supplementation of the ITS.

- Requirement for information on Stage 2 exposures, PDs and risk provisions should also be deleted, as these hardly provide any additional information on the extent to which the economic activities of the institutions can be qualified as sustainable.
- We consider the inclusion of information on interest income generated by the assets in Pillar 3 reports to be inappropriate. The disclosures should focus on prudential information on ESG risks, which enable an assessment of the risk profile of the institutions.

- As regards the timeline proposed and transitional period proposed for the disclosure of the GAR, please see our answer to question 1.

- We consider the repeated disclosure of the templates (8 and 9 according to EBA Pillar 3 ITS and 1 and 3 according to EBA Advice on Art. 8 Taxonomy Regulation) in two external reports of the institutions to be superfluous. A reference from the Pillar 3 report to the non-financial statement would be a feasible way to transparently present the required information. However, since the use of cross-references is severely restricted by Art. 434 CRR, templates 8 and 9 should be deleted from the Pillar 3 disclosure altogether. In our opinion, multiple disclosure of identical information is of no value to stakeholders, as the addressees interested in sustainability will certainly read the non-financial statement as well.

- In addition, any changes to the templates under Art. 8 of the Taxonomy Regulation would require changes to the ITS templates for the Pillar 3 report, which would lead to higher costs for the supervisory authorities or could cause uncertainty among institutions and stakeholders.

- If the Green Asset Ratio (GAR) should be reported in the Pillar 3 report, the timelines of the NFRD, CSRD and any other legislation implementing the EU Taxonomy should be adhered to. This means that reporting on the GAR should be postponed for institutions that do not fall under the scope of the NFRD until the CSRD enters into force.
- The purpose, structure, and instructions of the template 10 are unclear. It is unclear, whether the intention is to report financial activities contributing to any environmental objectives, which are either not eligible for GAR calculation or not strictly aligned with taxonomy criteria, or whether the reporting is limited to CCM and CCA activities, which do not fully align with taxonomy criteria. It is also unclear whether it is expected that all financial activities contributing to environmental objectives are mitigating climate change risk, and should be allocated to either transition or physical risk.
- We understand the need for forward looking information and scenario analysis. Nevertheless, considering the very early stage and the workload of developing the risk models and data collection for climate change risks, the quantitative reporting should at this stage focus on static information, while the qualitative information gives management’s opinion of the current and forward looking status of the institutions readiness for comprehensive analysis and modelling of climate change risks.

- In our opinion, disclosure should not be overloaded. Currently, the institutions are concentrating on the implementation of the requirements from the Taxonomy Regulation so that the data required in the ITS inventory is correctly recorded and disclosed.
European Association of Public Banks (EAPB)