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ESGComplianceFinanceSeptember 05, 2023

EBA Pillar 3 initiative gathers pace as banks step up ESG and green reporting

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.

Expanding ESG Data Collection: ESAP Platform & EBA DPM 3.3

On top of that, the EBA's ambition for the ESG data collection program has expanded beyond individual disclosures. The early intention was to require institutions to make public their disclosures via their own websites in PDF or similar format. The plan now includes reporting the full set of Pillar 3 disclosures, not just ESG-related data, in XBRL format. This data will be used to feed EUCLID (the European Centralized Infrastructure of Data) and the EBA's Pillar 3 hub project, which will later contribute to the European Single Access Point (ESAP).

ESAP aims to be a one-stop shop offering free access to financial and sustainability-related information made public by EU companies and listing EU investment products in compliance with relevant European directives and regulations. It will help to support the broader objectives of the European Green Deal initiative.

The EU believes that the ESAP platform represents a huge potential for helping banks to collect much of the ESG data relating to their counterparties, which can be used later for reporting EBA ESG Pillar 3 templates as well as for other, internal uses.

The publication of EBA DPM 3.3 is a key milestone in the attempt to feed ESAP, the Pillar 3 hub project and EUCLID. DPM 3.3 provides the details of the two XBRL requirements for reporting EBA ESG Pillar 3, namely:

  1. ESG 3.3, and
  2. Pillar 3.3, which also includes financial, COREP and remuneration data.

The EBA ESG Pillar 3 data sets needed for these two reporting mechanisms are identical and there are about 2,800 validation rules in place to ensure the figures are aligned.

It’s also worth mentioning that, as yet there are no cross-validation rules in place between EBA ESG Pillar 3 disclosures and other existing reporting such as FINREP. Furthermore, the EBA ESG Pillar 3 templates for GAR and BTAR so far include just climate change mitigation and climate change adaptation, while last quarter the EU updated the KPI-GAR and taxonomy regulations and the related templates to include the four other environmental objectives of the EU taxonomy. We can therefore expect the EBA ESG Pillar 3 templates to be updated in the future to stay aligned with the KPI-GAR.

Meanwhile, the EBA will open the requirements to all banks operating in the EU when it introduces CRR3 in 2025. While it may introduce some proportionality principles to ease implementation for these smaller institutions, the new entities in scope won’t benefit from the transitional periods granted to large bank, which ranged from 2023 to 2025.

This may create challenges for smaller entities that have limited resources, and are in many cases at the early stages of considering how to implement ESG within their organizations, as illustrated by the CSSF self-assessment on the management of climate-related and environmental risks by a sample of Less Significant Institutions in Luxembourg.

The Road to a Green and Profitable Future

With the EBA ESG Pillar 3 disclosures initiative gathering momentum, financial institutions must act swiftly to meet their green reporting obligations. By preparing their processes and systems, building ESG expertise, and collaborating across departments, banks can navigate the challenges and embrace the opportunities presented by the evolving ESG landscape. As the financial sector takes these important steps, it paves the way for a greener and more profitable future, aligning with the wider objectives of the European Green Deal initiative. Wolters Kluwer can help you meet your regulatory requirements and manage ESG risks efficiently. Explore our award-winning ESG solutions.

Herve Jager
Lead Product Manager, Regulatory Reporting, Wolters Kluwer FRR
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