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Deloitte Insurance Alert | Issue 1 Deloitte Audit SRL The Mark Tower, 84-98 Grivitei Road, 8th Floor Bucharest, District 1, Romania, 010735 Tel: +40 21 222 16 61 Fax: +40 21 222 16 60 www.deloitte.ro Deloitte Banking Alert April 2021 The EBA is consulting on disclosures for ESG risks under the Pillar 3 framework The European Banking Authority (EBA) published a consultation paper on draft implementing technical standards (ITS) on Pillar 3 disclosures on Environmental, Social and Governance (ESG) risks. The draft technical standards provide a framework for ESG disclosures to ensure stakeholders are informed about ESG exposures and strategies and can make informed decisions and exercise market discipline. The publication also includes details of the proposed Green Asset Ratio, which integrates the EU Taxonomy into bank disclosure requirements for the first time. The consultation is the latest in a series of initiatives at the EU-level developing the ESG risk disclosure framework. It is crucial for banks to have a holistic, joined-up understanding of how the various initiatives apply, to identify synergies and dependencies across different requirements and banks’ implementation workstreams. What will banks be required to disclose? The ITS introduces eight templates, covering transition risk and physical risk, and requiring a combination of quantitative and qualitative information. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL” ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as "Deloitte Global") does not provide services to clients. Please see www.deloitte.com/ro/about to learn more about our global network of member firms. Transition risk (quantitative information): The disclosure requirements focus on banking book exposures, although banks with trading books over a certain size threshold (in excess of EUR 20 million or 6% of the bank’s total assets) will be required also to produce ESG disclosures in relation to their exposures. Physical risk (quantitative information): Banks will be required to disclose information on banking book exposures to NFCs, and on their activities in geographies and sectors that are most exposed to chronic and acute climate change physical risk. They will also be required to disclose information on how collateral held is exposed to physical risks. Risk mitigating actions (quantitative information): Beyond the disclosures mentioned above, there is a requirement to disclose additional quantitative information on those assets and exposures that are aligned with the EU Taxonomy Regulation. The EBA’s intention is that stakeholders should be able to analyse the evolution of the level of alignment over time, and the targets for alignment set by banks. Wider ESG risks (qualitative information): The ITS also considers disclosure requirements for wider ESG risks. At this stage, banks will only be required to disclose qualitative information. Quantitative disclosures will be introduced at a later stage, via separate ITS. The disclosure requirements proposed in this consultation paper are organized by risk category: a. Table 1 - Qualitative information on Environmental risk; b. Table 2 - Qualitative information on Social risk; c. Table 3 - Qualitative information on Governance risk. Under each risk category, the disclosure requirements target three aspects: governance, business model and strategy, and risk management. What is the Green Asset Ratio? The Green Asset Ratio (GAR) is a KPI proposed by the EBA for measuring the portion of banks’ EU-level banking book exposures that contribute to climate change adaptation or mitigation. Banks will be required to disclose a breakdown of the ratio by environmental objective and type of counterparty, alongside the total GAR. Moreover, institutions shall disclose together with the GAR, information on the percentage of their total assets covered by the GAR, in order to facilitate comparability of the GAR and of institutions’ level of alignment with the Taxonomy Regulation. Timeline for disclosures The EBA is proposing a phased approach to implementation, with a transition period for certain disclosures for which data collection will be the most challenging. Disclosure will be on an annual basis for the first year, and semi-annual thereafter. 2 Banks have a long journey ahead and must make a concerted effort now to put the building blocks and framework in place to commence gathering the relevant information, in order to be fully compliant with the disclosure requirements by June 2022. Conclusions Disclosure of information on ESG risks is a vital tool to promote market discipline, allowing stakeholders to assess banks’ ESG related risks and sustainable finance strategy. Banks have a long way to go: An ECB report on institutions’ climate-related and environmental risk disclosures, published in November 2020, found that “virtually none” of the banks in the SSM directly- supervised by the ECB currently meet the minimum level of disclosures set out in the ECB Guide on climate risks, or the TCFD recommendations. How can Deloitte help you? Deloitte is committed to supporting sustainable banking principles in order to make an impact that matters concerning economic, environmental and social indices, and promotes sustainable development. Therefore, we are here to support your organization with the following services: • Development and support of an integrated and sustainable business strategy, to help the bank be better able to develop products and services, which satisfy the economic, environmental and social requirements and meet the needs of all stakeholders. • Development and implementation of the Environmental and Social Risk Management Framework • Risk and materiality assessments. Business impact of sustainability is complex; most companies do not know where to begin or how to address it. • Controls implementation: As more companies are starting to report on their climate change and sustainability efforts, effective controls around gathering, maintaining, and presenting relevant data becomes a vital part. 3 • Sustainability reporting and disclosure of corporate responsibility and sustainability accomplishments to investors, employees, communities, and other stakeholders. • Operating & Business model assessment and re-design, taking into consideration sustainability concerns • Benchmarking and Trend analysis to identify global and national sustainability trends and their implications for businesses of similar size and business model • Advise and lead sustainability projects for banks - project management of green and social initiatives and also monitoring and evaluation and impact assessments of such projects For further questions regarding the aspects mentioned in this alert, please don’t hesitate to contact us. Dimitrios Goranitis FSI Risk & Regulatory Advisory Partner, Deloitte Central Europe Tel: +40 751 250 884 Email: [email protected] Andrada Tanase FSI Risk & Regulatory Advisory Senior Manager Tel: +40 729 966 403 Email: [email protected] Link to the draft EBA Guidelines: https://www.eba.europa.eu/eba-launches-public-consultation-draft-technical-standards-pillar-3-disclosures-esg-risks 4 .
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