banks and green data

Once the EU directive is implemented, banks should be able to access much more granular climate data from companies.

The EU’s Corporate Sustainability Reporting Directive (CSRD) is part of a package of measures announced in April to boost the sustainability of the EU’s financial sector, in support of the European Green Deal to make the EU ‘climate neutral’ by 2050.

EU banks already report sustainability information under the Non-financial Reporting Directive (NFRD). But their ability to assess the indirect environmental impact of their investments can be hampered by the limitations in the data disclosed by the companies they finance, particularly unlisted firms and small and medium-sized enterprises (SMEs).

“Banks are subject to a growing wave of requirements around climate and environmental financial risk management, and sustainability-related disclosure,” says Kelly Sporn, senior policy adviser on sustainability regulation at law firm Allen & Overy. “Data is the vital piece of this jigsaw of new expectations hitting the sector,” she says, adding that gaps in data disclosure at present can put the banking sector in a very challenging position.

The CSRD is part of efforts of address this data deficit, allowing banks to access much more granular data on greenhouse gas emissions by borrowers and investee companies, which should help them more effectively calculate their own sustainability metrics, such as green asset ratios (GARs).

GAR requirements

GARs were proposed earlier this year by the European Banking Authority and will require banks to report on how much of their portfolio is dedicated to climate-friendly businesses. They will also provide a means of public accountability for banks that have made net-zero pledges. The provisional timeline for when GARs first have to be reported is provisionally end-2022.

“Banks will have to disclose in much greater detail how they will meet key performance indicators related to environmental concerns linked to the Paris Climate Agreement,” says Monsur Hussain, head of financial institution regulatory research at Fitch Ratings.

The European Commission is predicting that the number of companies in scope under their proposals will increase from around 11,000 to 49,000

Kelly Sporn, Allen & Overy

“But banks don’t really produce high greenhouse gas emissions on their own; they are exposed via the counterparties that they lend to. Therefore, banks can only report on these metrics if they receive sufficient information from the sectors they finance,” he says.

“The CSRD will help banks get the essential data need so they can meet their obligations.”

At present, banks can rely on less sophisticated methodology, such as best estimates and proxy information, to calculate climate metrics in the absence of sufficiently rigorous data sets, says Janine Dow, senior director, sustainable finance at Fitch Ratings.

The standardisation of sustainability reporting and the CSRD’s broad remit, covering all large companies and listed SMEs, should provide banks with a vast amount of additional reliable information.

“The CSRD will increase the quantity of information available to banks, to enable them to meet their own internal decision-making, regulatory obligations and external disclosures,” says Jon Williams, partner for sustainability and climate change at PwC.

Gaps and shortfalls

At the moment, banks can struggle to get enough emissions data from SMEs in particular. The CSRD should ensure much more information from listed SMEs, but the application of the CSRD will be voluntary for non-listed SMEs.

“The European Commission is predicting that the number of companies in scope under their proposals will increase from around 11,000 to 49,000. There are still gaps, however; smaller and unlisted SMEs are out of scope, and it still is not clear how far non-EU countries with substantial bases of operations will remain outside the scope of the final directive,” Ms Sporn says.

The CSRD’s common set of mandatory sustainability disclosure standards will be applied at end-2023 at the earliest, meaning that banks could face data shortfalls when GARs first have to be reported.

“Banks are already going to have to report earlier on various disclosure requirements, including GARs, a year or so before. So there is going to be an interregnum period, when banks will have to meet these new requirements without necessarily receiving the information from their counterparties,” Mr Hussain says.

The CSRD is likely to be one of several sustainability reporting standards implemented in the next few years. The UK government is putting disclosure requirements at the heart of its post-Brexit green policy, and it is likely that the UN’s Climate Change Conference, known as COP26, in Glasgow in November will see further announcements from other countries, including an international sustainability reporting standard.

Continue reading: Climate change set to drive further bank model transformation


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