The European Commission has made a point of finding a way to direct its financial resources on achieving a sustainable and competitive EU economy. For this purpose, it has decided to set the rules for disclosure of transparent information on sustainability for individual measures and sectors. The entire financial sector, banks, market participants and other institutions, and namely authorities responsible for the functioning and control of the financial market have to react to this development.
New report of the ECB on the progress banks have made on disclosing transparent information
In terms of quality assessment of the f transparent disclosure of climate-related and environmental risk profiles, the European Central Bank (ECB) focuses on the fulfilment of requirements presented in its guide from 2020 and follows up on the last assessment from the same year. In the current Progress report, which was published on 14 March 2022, the ECB focused on disclosures made at 109 selected banks, which fall under its direct control, and used data from the end of 2021. The ECB thus connected to the last assessment from 2020, in order to provide comparison and assess the development.
Based on the assessment of the ECB, 70% of the assessed banks provide information on the involvement of such risks in the decision-making of management bodies, but 75% of them do not disclose the impact of such risks on their risk profiles. However, half of them also perceive that they are exposed to these risks. It also turned out that banks provide insufficient proof of fulfilment of measures related to risks and the fulfilment of obligations on the international level. From the perspective of key and risk indicators, only 50% of banks disclose their connection to climate and environmental risks, and only 15% disclose the information concerning emissions within the entire value chain and all activities.
Based on the conclusions of the assessment, it is obvious that banks generally do not comply with the requirements for disclosing and assessing transparent information on climate-related and environmental risk profiles, although mild progress has been achieved and the endeavour of banks to eliminate their deficiencies in this area is apparent.
Increasing the quality of reporting in this area is in the interest of the banks themselves, since provable recognition of such risks is significant for a verifiable fulfilment of their obligations for climate protection as well as for the clients themselves and the performance of their obligations. In this respect, the ECB will continue to play a significant role, providing feedback to the assessed banks, and will place this issue amongst its priority control activities in the 2022-2024 period. It will thus help the controlled banks to achieve the fulfilment of all claims, including obligatory binding standards of the 3rd pillar focusing on environmental risks, social risks and EBA management risks. In this context, the ECB positively assesses the banks’ potential to quickly adapt to new approaches in reflecting sustainability in the future.
Technical ESG standards of the European Banking Authority
On 24 January 2022, the European Banking Authority (EBA) published theBinding technical standards on Pillar 3 disclosures on ESG risks. EBA thus connects to the relevant provisions of capital requirements regulation (CRR) and the related requirements for disclosing information on ESG risks, including physical and transfer risks. Binding technical standards of the EBA relate to large institutions with securities held for trading on the regulated market in member states. Companies are thus facing the challenge of disclosing a wide range of information on ESG risks, since they need to reflect them in their activities and portfolio.
These standards should result in an improvement in the awareness level of the stakeholders, definition of individual requirements for disclosure and key performance indicators with regard to ESG risks. The main goal is the increase in transparency and market discipline, as well as the creation of an environment in which all participants would have all relevant information for strategic decision-making from the ESG risk perspective, too. Based on the harmonised approach, comparison of the way how obliged institutions reflect sustainability aspects in their assessment of risks and obligations in terms of climate, strategic plans and business models will also be possible.
From this perspective, it is significant that the relevant authorities are obliged to include in their reports the green asset ratio and the ratio of activities of institutions contributing to EU sustainability goals. Pursuant to the new EBA standards, the relevant institutions will be obliged to provide their first complete disclosure of information in 2023.
The ESAs’ supervisory statement on the application of the SFDR regulation was adopted
Following the legislative development with regard to the transparent disclosure of information on sustainability, the EBA, the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA) updated the Sustainable Finance Disclosure Regulation (SFDR).
The statement includes a timeline for the application of individual regulations and obligations arising from SFDR in reaction to a situation where particular regulatory technical standards are about to be adopted through delegated acts. It thus provides instructions to obliged entities and competent authorities in member states regarding the ways to meet and control the obligations in the interim period from 10 March 2021 to 1 January 2023. The current update is applicable to information disclosed based on Articles 5 and 6 of the taxonomy directive, pursuant to which market participants are obliged to provide information, through the numerical disclosure of the percentage, on the extent to which investments underlying the financial product are taxonomy-aligned. In addition, where information is not readily available from investee companies’ public disclosures, financial market participants may rely on equivalent information on taxonomy-alignment obtained directly from investee companies or from third party providers.
Sustainable finance is a priority for ESMA
The topic of sustainable finance became an integral part of the ESMA agenda, which has now published its Sustainable Finance Roadmap 2022–2024. The roadmap reflects the increasing interest of investors in sustainable financial products and ESMA tasks in terms of control, investor protection and the increase in market transparency. As part of the main priorities, it is ESMA’s aim to support transparency and the fight against greenwashing, while perceiving the need to increase its own capacities in this area, as well as supporting the abilities of competent authorities in member states. Given the new legislative framework for sustainable finance and the unified criteria, ESMA will also focus on the possibilities of assessing and analysing the market ESG and the related risks. ESMA thus senses opportunities and challenges related to sustainable finance and can thus act based on its experience with the adaptation in relation to the development of other financial market areas in the past.