Breaking Down EU Pillar 3: ESG Disclosures for Commercial Banks

Regulatory Compliance November 14, 2023

Pillar 3 disclosures leverage existing ESG frameworks to standardize sustainability data reporting

In the realm of financial regulation, the banking sector is one of the most heavily regulated sectors. That’s why it’s not surprising to see the industry faced with further requirements, aimed at bringing new layers of transparency and higher accountability across banks. Under the Capital Requirements Regulation (CRR), some large banks are required to report on ESG risks. Early in 2022, the European Banking Authority (EBA) published the “Implementing Technical Standards” (ITS) detailing these ESG disclosures, referred below as the EU ESG Pillar 3 disclosures.

The EBA ESG Pillar 3 package will help to address shortcomings of institutions’ current ESG disclosures at EU level by setting mandatory and consistent disclosure requirements, including granular templates, tables and associated instructions,” said the EBA in a press release.

What Is Included in Pillar 3 Disclosures?

Some large institutions in the EU are expected to report

  • Green Asset Ratio (GAR), which references alignment to the EU Taxonomy for two of its six objectives (Climate Change Mitigation and Climate Change Adaptation).
  • Banking Book Taxonomy Alignment Ratio (BTAR) is similar to that of GAR but allows for the use of estimations
  • Scope 3 emissions for all counterparties
  • Energy Performance Certificate (EPC) of loans collateralized by immovable property 
  • Paris alignment percentage per exposed NACE sector and its distance to the  International Energy Agency’s (IEA) target 
  • List of exposures to top 20 carbon-intensive firms
  • Physical risk assessment of exposures by region and NACE sectors

To help standardization across the board, templates and tables are made available to banks. Tables should be used for qualitative disclosures (one table per ESG pillar), and templates for quantitative data (five for climate-related risk disclosures, three for the GAR, and two for mitigating actions). Five out of the ten templates are due in 2023, using 2022 as the reference period.

Sourcing Reliable Data for Accurate ESG Reporting

In order to facilitate data gathering, and in an effort to improve sustainability data consistency, Pillar 3 disclosures are built on existing frameworks. As mentioned above, EU Taxonomy is one of them, as well as TCFD and NFRD.

In its own words, “the EBA has deliberately designed the KPIs on taxonomy alignment disclosure requirements, so they match the data and timelines, that large corporates under the NFRD are required to produce following Article 8 of the Taxonomy Regulation.” The banking authority has also stressed the need of collecting data on a best-effort basis.

At Clarity AI we are committed to providing the highest quality data for our clients to confidently analyze and report on sustainability. This is possible through a powerful, scalable technology, trained by a global team of sustainability experts and data scientists.

EU Taxonomy

Our coverage of companies’ reported data for EU Taxonomy is five times higher than any other provider. We also offer high-quality estimates for both eligibility and alignment that are not subject to NFRD, and we are the only provider that covers all six environmental-related objectives. Additionally, we have liaised with consultants, regulatory and industry professionals to ensure our methodology is as closely aligned to the intention of the regulation as possible.

Carbon emissions

Clarity AI also leads CO2 emissions data coverage, with up to three times more than other providers. We offer Scope 1, 2 and 3 data, both reported and estimated, with full transparency in the underlying calculation to make sure our clients feel comfortable with the data they use in their decision-making and compliance processes.

Our Climate solutions also include data and insights to assess and benchmark alignment with Net Zero and Paris Agreement frameworks, and all quantitative TCFD- related disclosures.

To cope with the evolving regulatory landscape, our commitment is to be flexible and adaptable to changes, which is only possible thanks to our digital DNA.

Contact us today to learn more about us and how we can help with Pillar 3 disclosures.

This article was originally published in December 21, 2022.

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