Response to consultation on draft ITS on Pillar disclosures on ESG risk

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Question 1: Are the instructions, tables and templates clear to the respondents?

On any exacting conception of “clarity”, it can hardly be assessed on the basis of the English version only; the clarity of the instructions should be assessed in the national languages, taking the national habits, practices and terminology into account. Action and language are hardly separable.

Question 2: Do the respondents identify any discrepancies between these tables, templates and instructions and the disclosure requirements set out in the underlying regulation?

NA

Question 3: Do the respondents agree that the new draft ITS fits the purpose of the underlying regulation?

The sequential approach may be questioned in this respect,. although there is also good rationale for it, in terms of feasibility.

Simultaneous effort in the different directions would be an important expression of the kind of “engagement” with stakeholders and the public the EBA is trying to promote as an effective way to meet the purposes of the regulation.

Question 4: Do the respondents agree that the tables with qualitative information proposed capture properly the information that institutions should provide?

Ethical considerations should be made more specific, including goals relevant to social ethics such as limiting inequalities within the company, and contributing to social fairness in society. It would be helpful to include inequality and diversity in 3(iii) of Table 3 - Qualitative information on Governance risk.

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?

NA

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?

Energy performance labels provide essential information but in various formats. The aggregation of the information is likely to be difficult. For information to be comparable, it seems that it would be advisable to enter into detailed references to the relevant labels in the various countries, and to provide an explicit index calculation procedure.

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?

It might be useful to provide information relating to one or more of the taxonomy-aligned climate-related hazards at different maturities, such as temperature-related, wind-related, water-related and solid mass-related activities, as this would help regulators to understand how individual institutions address risk-related to climate-related hazards. This would highlight the multidimensional character of the challenges.

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?

NA

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?

The 2 degrees reference scenario is a reasonable baseline scenario for companies to develop strategies to minimise greenhouse gas emissions. It provides a methodology for them to reduce greenhouse emissions in a cost-effective way. It is not clear to me whether the assumption of the scenario considers a possible increase in the number of middle-income families and overall population growth in developing countries as suggested by the International Energy Agency (IEA). The IEA New Policies scenario suggests that greenhouse gas emissions are likely to increase as a result of rising oil consumption resulting from the increase in the aforementioned middle-income families and the developing countries with growing populations. Therefore, we believe that it would be beneficial to consider including increased oil consumption, resulting from the increasing number middle-income families and population growth in developing countries, in the 2 degrees reference scenario.

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

Although the top 20 global polluting companies are likely to contribute to the majority of greenhouse gas emissions, they may not provide sufficient levels of information on how climate-change transition risk could exacerbate the exposure of individual institutions to credit risk associated with other polluting companies. It would be beneficial for individual institutions to provide exposures of the top 20 polluting companies at bank-level for two reasons. First, regulators would understand how individual institutions could be affected by climate-related exposures in different sectors. Second, the category of ‘brown’ industries might change as a result of the transition, and new top polluting companies may emerge. Regulators may be required to amend the assumptions/methodologies they use in this template.

Question 11: What are respondents view on the way template 6 reflects how the trading book of institutions may be impacted by climate change transition risk? Do respondents agree that the threshold proposed to determine which institutions have to disclose this template is the appropriate threshold? Feedback on whether there are alternative ways to present information on the trading book that may allow for a better understanding of how climate change transition risk may impact the trading portfolio.

The durations of the exposures/loans should be considered, as the time-horizon of the climate-related exposures would provide regulators with information on how the effects of climate change could affect the balance sheets of banks. Additionally, template 6, including information relating to the time-horizon of the climate-related exposures, could be used in conjunction with the climate-related stress test. This would also provide granular information on how sector-level climate-related exposures affect the balance sheets of banks.

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?

Yes, I agree. However, it would be useful to add a column with useful information relating to the geographical location of the banks’ assets, as the likelihood and size of the impact of climate risks may vary across different geographical locations.

Question 13: Regarding template 7, specific feedback is asked regarding the methodologies and data sources that institutions may use to identify the relevant geographies. Feedback is also required on the content and disclosures proposed in the extended version of the template and on the transitional period proposed.

The information relating to relevant geographies could be extracted and summarised by countries and postal districts.
In some cases, an even more refined breakdown would be in order; for example, when exposure to river floods is severe in some parts of cities (think of southern France for example). The use of detailed information about this could help the financial companies to resist involvement in new, hazardous real-estate operations.

Question 14: Regarding templates 8 and 9, do respondents consider that this template should be enriched including information not only on assets aligned with the taxonomy but also in the interest income generated by those assets? Do respondents agree with the timeline proposed and transitional period proposed for the disclosure of these templates?

It would be beneficial to include interest income or interest, as they would reflect the credit risk associated with repayments of the principal and interest.

Question 15: Specific feedback is required from respondents on the way template 10 is defined, and on whether there is additional information that should be added. Feedback is sought on alternative disclosure formats that may contribute to a more standardised and comparable disclosure.

It would be helpful to include economic exposure to climate change transition and/or physical risks, as the trading books of banks are likely to contain leveraged derivative trades. Leveraged derivative trade exposures may differ from real exposures associated with loans.

Question 16: Finally, respondents feedback on whether the draft ITS should include a specific template on forward looking information and scenario analysis, beyond the qualitative information currently captured in the tables and templates under consultation and the information required in template 4.

NA

Name of the organization

SOAS University of London in collaboration with in collaboration with "Chaire Ethique et Finance"  (CEM, FMSH) and NECC-Dynamite