EU banks under the spotlight 

Increasing regulatory focus on climate risk

Highlighting the continuously increasing importance of ESG risk disclosures as an instrument to achieve and safeguard market discipline, the European Banking Authority (EBA) issued binding standards on Pillar 3 ESG risk disclosures in January 2022. These standards enable stakeholders to evaluate banks' ESG-related risks and sustainable finance strategies. Banks are required to provide information about their portfolios in three categories:

• Transition risks
• Physical climate change risks
• Green Asset Ratio and mitigation activities

As illustrated in figure 1 below, these categories are further divided across ten quantitative granular templates, of which five (1, 2, 4, 5 and 10) are mandatory starting from 2022 year-end reporting. In addition, template 3 must also be disclosed if banks have the ability to do so. The remaining five templates are divided over 2023 and 2024 reporting periods.

Figure 1: ESG Pillar 3 disclosures overview

Benchmark and insights

The first ESG Pillar 3 reports provided initial insights into the banks’ ESG risks for regulators, investors and other stakeholders. We will update our benchmarking analysis twice a year, to incorporate new data and trends as disclosure practices mature. Additionally, we will perform specific peer group analyses to offer clients across Europe tailored insights and advice, supporting them with all aspects ranging from data collection to solution implementation.

While financial institutions prepare for the implementation of new Pillar 3 reporting templates, of which template 6, 7 & 8 are already applicable for FY 2023 reporting, we see potential challenges related to the regulatory interpretation, data availability and quality, the experience to implement all the relevant reporting and disclosure criteria, and the ability to establish the right connections to other reporting requirements (e.g., CSRD, EU Taxonomy, ECB Guide and other imminent future requirements). Since the Pillar 3 reporting process is still developing for most banks, the reporting methods and assumptions applied are not yet consistent. Observed changes over the different reporting periods can therefore be attributed to actual changes in exposures, but could also be the result of the change of approach or increased quality of underlying data.

We encourage all organisations to take active measures to prepare for consistent and transparent ESG-related reporting and disclosure. To discuss any of the themes of this article, or for help with your own Pillar 3 ESG reporting, please contact Anne-Claire van den Wall Bake-Dijkstra, Eric de Weerdt or your usual Deloitte contact.