As Europe accelerates its transition to a sustainable future, the banking sector is under increasing regulatory pressure to transparently disclose the impact of climate risks on their current and future operations. The latest effort to address these challenges comes in the form of mandatory ESG (Environmental, Social, and Governance) reporting under the European Banking Authority (EBA) Pillar 3 regulations, which serve as a key building block in the EU's broader ambition to create a resilient financial sector alongside the broader Sustainable Finance Disclosure Regulation (SFDR) sitting within the EU’s overall Sustainable Finance Framework. But why now?
In short, existing reporting methods have failed to provide regulators with the clear and consistent data necessary to fully understand how climate change affects banking operations, financial performance, and risk profiles. With climate risks intensifying, regulators are increasingly focused on ensuring banks’ resilience to future financial challenges and facilitating their participation in leading Europe towards net zero.
Now that the EBA Pillar 3 ESG regulations are fully in place, we will explore them in detail in a three-part series. This series will break down what these regulations entail, their implications for banks’ climate and ESG data strategies, and how to address key challenges.
What are the EBA ESG Pillar 3 regulations?
The EBA Pillar 3 disclosure regime is a key component of the Basel III regulatory framework established in the wake of the 2007-8 financial crisis. Covering transparency and market discipline topics, the regulations span a range of reporting requirements relating to capital adequacy and risk management and exposure.
ESG topics, and climate change in particular, play a prominent role within the overall Pillar 3 framework. The ESG-related components of EBA Pillar 3 disclosures became mandatory for large banks with an EU presence in 2022, and for smaller institutions in June 2024 to allow additional time for full implementation. Now the rules are fully in place, banks are generally required to disclose on an annual basis.
Among other topics, the requirements cover climate transition and physical risks, ESG risk management practices, scenario analysis and stress testing. The EBA regulations also introduce the ‘Green Asset Ratio’ metric, which measures the proportion of bank assets that are aligned with the EU Sustainable Finance Taxonomy.
Overview of Pillar 3 ESG disclosures, template by template
In addition to outlining their overall ESG-related risk management and decision-making processes, banks subject to EBA Pillar 3 must disclose detailed information on climate-related risk exposure. The data requirements are laid out across 10 templates, which are intended to standardise and enhance the transparency of disclosed information. The templates are grouped in four areas: transition risk, physical risk, Green Asset Ratio (GAR) and other topics.
Banks’ challenges in reporting to the new Pillar 3 standards
One of the most challenging aspects of the Pillar 3 disclosure standards is that they require banks to establish a detailed understanding of the climate performance of their exposures at the counterparty (i.e. company or individual) level.
Since banks invest far beyond just the stock market, many of the companies they lend to or hold shares in are unlisted. Unlisted firms often do not disclose any meaningful climate-relevant information, such as their greenhouse gas emissions, emissions intensity, or vulnerability to extreme weather events. Even companies that do report their emissions and other climate-relevant metrics also tend to do so at an aggregated level, inconsistently, and with limited transparency on their methodological approach to counting emissions and consolidating them across subsidiaries, which limits the comparability of the disclosures.
Banks hoping to use disclosed data alone for their EBA Pillar 3 disclosures face some daunting data challenges. At a minimum, they now need to be able to fully identify climate risk-related data points not just at the portfolio level, but at the level of individual clients (i.e. ‘exposures’), to then be aggregated by sector. The limited consistency, availability and granularity available from company disclosures can make this very difficult, so most banks may need to fill – potentially very large – gaps in the information they gather from companies’ disclosures with comparable and objective measures of firm performance.
Climate data requirements for EBA Pillar 3 disclosures
Further articles in this series will go into more depth on exactly what information banks need to complete their disclosures, but here is a high-level look at what is in store for banks subject to the regulations.
Templates 1-4: Transition risk
In Templates 1-4, banks are required to collate and report a swathe of information on their exposures to different sectors, the emissions associated with these exposures, the energy efficiency of real estate properties on their books, and the alignment of their business with climate policy scenarios. They must also provide additional detail on exposures to the world’s 20 most carbon-emitting companies.
Financial information (meaning the size and characteristics of exposures in terms of carrying amounts, maturities, and any relevant impairments), held by the bank, is needed in various places across the first four templates.
Information on the climate impact of these exposures, however, typically needs to be sourced from third parties – from data providers like Asset Impact, from the companies themselves, or a combination of both. Underlying data points required across the first four templates include:
- Classification of counterparties’ economic activities by NACE code
- Counterparty greenhouse gas emissions in tons of carbon dioxide equivalent (tCO2e) across all scopes, with Scope 3 broken out separately
- The share of counterparty emissions derived from company-specific reporting
- Average energy efficiency of commercial and residential real estate used as collateral for loans (kWh/m2) and corresponding EPC ratings
- Emissions intensity metrics by sector (e.g., average tCO2 per unit of activity or output)
- Share of high/low carbon technologies by sector
- Exposures to the 20 largest carbon-emitting companies globally
Template 5: Physical risk
The physical risk disclosures in Template 5 request information on the exposure of physical objects underlying each exposure to a range of physical climate risks; that is, they require facility-level data or its equivalent. The underlying data required includes:
- Locations sensitive to chronic climate change events (e.g. sea level rise, rising average temperatures)
- Locations sensitive to acute climate change events (e.g. extreme weather)
- Locations sensitive to acute and chronic climate change events
Templates 6-8: Green Asset Ratio
The final main set of disclosures relate to GAR metrics that are already well-established under the EU Taxonomy and the SFDR. At a high level, this simply requires matching banks’ eligible assets to activities classified under the EU Taxonomy.
Template 6 summarises the content of Templates 7-8, which require information on stocks and flows of GAR assets expressed in monetary terms and as a proportion of total GAR-eligible assets. Banks must also be able to break their aggregate figures down into several specific categories. Starting with assets in ‘taxonomy-relevant’ (i.e. eligible) sectors, the template then asks for the subset classified as ‘environmentally sustainable’ (i.e. taxonomy-aligned), and to specify which of these are ‘transitional’ and ‘enabling’ investments. This is required for climate mitigation and adaptation separately.
The calculation of a bank’s GAR can be done in several ways, using a combination of real, estimated and proxy data. However, a bank can in principle use similar information to arrive at a reasonable estimate of its GAR as it uses to meet the EBA’s requirements in Templates 1-5.
The starting point is the classification of counterparties’ economic activities by NACE code, which are subsequently mapped to the EU Taxonomy. This information can then be refined and augmented with the more detailed information on counterparties’ assets and economic activities already reported in other templates (e.g., the share of high/low carbon technologies used by that company).
Template 9: Banking Book Taxonomy Alignment Ratio (BTAR)
Template 9 is non-mandatory, and it is similar to the preceding three templates but asks for taxonomy alignment information on the full banking book, as opposed to bank assets. It uses the same categories.
Template 10: Other mitigating actions
The EU Taxonomy is not a perfect dictionary of climate-relevant activities. This is especially true in sectors undergoing rapid change. The final template allows banks to capture activities that they consider to be climate change-mitigating, but which may not be taxonomy-aligned. This could include investments in emerging technologies, and also financing of green activities in an indirect manner – such as lending to a local financial institution for on-lending to green activities.
How to approach EBA data requirements?
Faced with EBA Pillar 3 ESG requirements, banks are grappling with imperfect and often inconsistent data either reported by companies or estimated by third parties from various forms of statistical inference. Asset Impact’s data and analytics provide a bottom-up, transparent and comprehensive means of addressing the fundamental data problem banks subject to Pillar 3 requirements are facing.
Our datasets, which focus on transition risk but can be repurposed for other components of the EBA Pillar 3 disclosure regime, are built from the physical asset level upwards. Using information on individual physical assets and their owners, we assess the climate profile and performance of thousands of individual companies across 11 high-emitting sectors. The same methodology is applied to every company, does not depend on disclosures and covers over 66,000 legal entities, roughly half of which are unlisted subsidiaries of listed firms.
Whether the application is to calculate financed emissions, assess companies’ alignment with different transition scenarios, or assess the physical risk exposure of underlying assets – all of which are part of the Pillar 3 requirements – our datasets, which are trusted by top tier institutions including Barclays, TD Bank, BBVA, ING, BNP Paribas and many more, can support banks with their Pillar 3 disclosures as well as a much broader range of regulatory data challenges.
Now you’ve got the basics down, click here to read the next article in the series. We examine the first two areas covered by templates 1-5: transition and physical risks related to the disclosure of an institution’s ‘banking books’.
Interested in learning how Asset Impact's data can help with EBA Pillar 3 disclosures and much more?