ESG Risks (Environmental, Social, Governance)

What is the Pillar III disclosure on ESG risks?

Disclosure of prudential information on ESG risks - the first disclosure of ESG risks was annual but from 2023 it starts to be semi-annual.  

The ITS is applicable from June 2022 with the first reference date on December 31, 2022. In this regulation, the EBA follows a sequential approach and is in line with taxonomy and other initiatives. Starting from December 2023, ESG risk disclosure must be submitted to the EBA via DPM 3.3 (also considered within the P3 Hub). This initiative aims to improve transparency and reporting of ESG risks in the banking sector.

What information must be disclosed?

The disclosure encompasses climate change and environmental risks, such as transition and physical risks, including the disclosure of exposures aligned with the "green taxonomy" and carbon-intensive activities. Additionally, social and governance risks are also taken into consideration.

Who are the concerned companies? 

From 28 June 2022, large institutions which have issued securities that are admitted to trading on a regulated market of any Member State, as defined in point (21) of Article 4(1) of Directive 2014/65/EU, shall disclose information on ESG risks, including physical risks and transition risks, as defined in the ITS defined by EBA. With the application of DPM 3.3., these institutions need to submit the disclosure templates beside external publication to the EBA as well.

Reporting templates: qualitative and quantitative templates

The ESG disclosure report consists of three qualitative tables and ten quantitative templates.  

The qualitative part is divided into business strategy and processes, governance, and risk management. Banks shall disclose to the public how they adjust their business strategy and how they may assign responsibility of management for sustainability goals. Regarding risk management, banks are obliged to report the processes to identify and monitor risk-sensitive sectors and exposures. The methodology of stress tests and scenario analysis concerning these ESG risks must also be disclosed. 

The climate-change related disclosures are separated into the different types of risks. Within this disclosure, there is a differentiation between transition risk, physical risk, and mitigation risks:  

• Transition risk can occur when moving towards a less polluting and greener economy.  
• Physical risk refers to the results from events caused by climate change, e.g., the extreme rainfall and flooding in Germany in 2021.  
• Mitigation risk is the process of planning for disasters and having a way to lessen negative impacts of climate change.  

Additionally, it is crucial to take into account the Key Performance Indicators (KPIs), particularly the significant GAR (Green Asset Ratio), which corresponds with the EU Taxonomy GAR, and the distinct KPI known as BTAR (Banking Book Taxonomy Alignment Ratio).

Explore ESG reporting in more detail: