The European Banking Authority's (EBA) Environmental, Social, and Governance (ESG) Pillar 3 disclosures rules came into force for large Tier 1 financial institutions at the end of 2022. This complex set of requirements demands that banks disclose various ESG-related data in multiple formats, pdf or excel for public disclosures and with XBRL for the regulators.
However, it's not just large institutions that are affected. By 2025, with the introduction of Capital Requirements Regulation 3 (CRR3), the EBA Pillar 3 disclosures on ESG risks will apply to all banks in the EU, regardless of size. As the go-live approaches, banks need to act promptly and make necessary preparations to meet their green reporting obligations.
EBA Disclosures Reporting Requirements
Under EBA Pillar 3 disclosures on ESG Risks for EU banks, affected entities are required to disclose their activities with relation to several potential ESG-related risk categories. These include:
- Climate-change related transition and physical risks
- Institutions’ mitigating actions supporting their counterparties in the transition to a carbon neutral economy and in the adaptation to climate change
- KPIs on institutions’ asset-financing activities that are environmentally sustainable according to the EU green taxonomy (Green Asset Ratio and BTAR)
- Qualitative information on how ESG considerations are being incorporated into governance, strategy, business model, and risk management frameworks.
To ease the transition to the new regime, the EBA has introduced proportionality measures that should help facilitate institutions’ disclosures, including a sequential implementation period from 2023 to 2025.
However, this is just the tip of the iceberg. The expectation is that banks will apply the same ESG principles across the whole of their organizations. Specifically, banks will need to:
- Set their ESG ambitions and ESG risk appetite at the highest level of management
- Build ESG expertise through internal staff training, acknowledging that finding people with ESG knowledge in the job market is challenging due to the topic's relative novelty
- Foster collaboration between Finance, Risk, and Regulatory teams, recognizing that ESG will impact daily business across the enterprise, as well as interactions with counterparties and customers
- Adopt standardized vocabulary and data architecture to ensure consistency of ESG data
- Stay up to date on ESG developments.