Climate, Research

EU banks are ill-equipped to report climate risk impacts, says EBF

By David Prosser
Image via Getty

Europe’s banks are struggling to assess their climate change impacts because their data quality is poor, there is little consensus on how to do the work and the regulator is taking a hands-off approach, according to a report from the European Banking Federation on climate risk. 

The EBF report states that unless banks make major improvements in key areas, they will find it increasingly difficult to manage climate risk effectively and submit accurate disclosures, leaving themselves open to accusations of greenwashing.

Multiple banks have pleaded with the regulator, the European Banking Authority, for a single set of technical standards on reporting climate-change exposures, but to no avail.

Pilar Gutierrez, head of the reporting and transparency unit at the EBA, said at an EBF digital roundtable on November 29 that while supervisors would play a role in supporting banks’ disclosure work, it would not be beneficial to provide a single set of standards.

“We have received multiple requests from banks to specify in our technical standards the methodologies that banks should use, the sources of data they should use and the scenarios they should apply,” she said. 

“Our view has been consistent … improving comparability is not necessarily linked to complete standardisation across banks.”

Banks face growing pressure to move quickly on climate risk — a European Central Bank report published earlier this year found that just 6% of the 130 or so banks and institutions it regulates were providing even “broadly adequate” disclosures on environmental and climate risk.

Banks face new climate risk reporting obligations in 2024

The EBF’s work has largely focused on the four areas where the EBA is in the process of introducing new disclosure requirements on sustainability.

Since the beginning of this year, banks in the EU have been required to report on their exposures to physical hazards — wildfires and floods, for example — and to the top 20 carbon-intensive firms worldwide. 

In 2024, they will also have to begin disclosing their financed emissions — the greenhouse gas emissions associated with their loans and investments — and publish a green asset ratio defining what proportion of their assets are invested in sustainable economic activities. 

The EBF study, undertaken to analyse how environmental factors could drive financial risk, highlights major challenges for banks as they try to identify, measure and manage these concerns. 

In each of these areas, banks’ efforts to comply with the EBA’s requirements are being undermined by serious weaknesses, the EBF’s report cautions. Problems exist both at the banks themselves and with their clients, where much of the sector’s environmental exposures reside.

Poor data holds back banks 

“Data in the context of sustainability is evolving so rapidly that it raises some very challenging but important questions,” said Brent Matthies, head of ESG framework and coordination at Nordea, one of 13 banks that worked with the EBF and ECB to produce the report

Most worryingly, banks do not currently have access to robust and accurate data on climate risk. They are forced to rely on estimates of emissions for large parts of their disclosures, and there is a lack of common data standards. It is not even clear which country list of the top 20 global carbon emitters banks should use, the EBF points out.

A second major issue, the EBF warns, is that banks lack clarity on the methodological approach they should take to assessment and disclosure. While regulators such as the EBA offer guidance on some issues, there are no industry standards in other areas. Some methodologies are enshrined in regulation while others are voluntary.

Raphaël Poignet, senior team lead at the ECB, said that while most banks were making progress on the quality and quantity of their environmental disclosures, there were many areas where improvements were still needed.

“For example, there is a general lack of substantiation of disclosures, especially around the quality of explanations of metrics,” he said.

EBF’s recommendations for banks to clean up data

To remedy such problems, the EBF has published 10 suggestions on how to enhance disclosure transparency across the banking sector. In some cases, banks will be able to implement its advice unilaterally; in others, change will be difficult without cross-industry collaboration.

Top 10 recommendations for banks

  • Be more transparent about how exposures are allocated to different portfolios and how they account for customers’ greenhouse gas emissions
  • Define the basis for assessing the materiality of excluded portfolios
  • Add the relative impact of baseline or trend volume recalculations to the methodology
  • Introduce data quality indicators and describe internally developed proxies
  • Explain reasoning behind the bank’s list of top 20 carbon-intensive firms
  • Align key datapoints across different areas, such as asset location and hazard scenarios
  • Align key terminologies, describing the types of hazard and time horizon 
  • Report physical hazard exposures in several tables to provide a more accurate picture of vulnerability by geographical area, as well as an aggregate table for all relevant exposures
  • Disclose use of expired energy performance certificates, as well as their use of external energy consumption data
  • Set out steps for applying the “do no significant harm” and “minimum social safeguards” criteria

Source: EBF report

On data shortcomings, the EBF calls for greater transparency about how banks are assessing customers’ emissions and where they have gaps, and suggests the launch of data-quality indicators that set out greater detail on the assumptions and estimates banks are making. 

It also urges banks to publish more detail on how and where they are sourcing data.

On methodology, the EBF believes banks need to publish more detail about the way in which they are analysing their data. And it suggests they work together to align key terminology and approaches in areas where there are not currently binding standards.

Matthies added: “[These are] targeted suggestions where we feel that either data or methodological (or both) uncertainties could be mitigated through increases in the amount of transparency that banks apply in their disclosures, therein achieving greater comparability and also mitigating greenwashing risk.”

The EBF said it would continue to work with banks and regulators to identify gaps in the sector’s approach to sustainability, and to promote pragmatic solutions.

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