EBA Published Results of EU-wide Pilot Exercise on Climate Risk

May 21, 2021 -The European Banking Authority (EBA) published the results of its first EU-wide pilot exercise on climate risk.  The EBA aimed to map banks’ exposures to climate risk and provide an insight into the green estimation efforts in the financial sector.

The revised CRR/CRD package established an EBA’s mandate to develop relevant qualitative and quantitative criteria that will assess the impact of ESG risks for financial institutions. Therefore, in 2020 the EBA launched a pilot exercise on climate risk aligned with similar initiatives run by national supervisors, central banks and European institutions. For the purpose of the exercise, the EBA used data collected directly from 29 banks using templates aligned with the supervisory reporting definitions. This pilot exercise was intended as an opportunity to investigate the performance of existing and newly developed climate risk assessment and classification tools.

Furthermore, the exercise aimed at testing banks’ ability to apply EU taxonomy requirements and estimates the current levels of taxonomy aligned exposures. According to the EU taxonomy regulation, banks should disclose the alignment of their exposures with taxonomy criteria starting from 2022. In addition, from 2022 banks will have to disclose the green asset ratio, as part of the Pillar 3 disclosures.

The results from the pilot exercise disclose big differences in banks’ application of the EU taxonomy.  Overall, the outcomes show that more disclosure on transition strategies and greenhouse gas (GHG) emissions would be needed in order to allow an accurate assessment of the climate risk. Moreover, the results indicated the need to expand banks’ data infrastructure to include clients’ information at activity level. The major findings of the exercise show that more than half of banks’ exposures to non-SME corporates (58% of total) are allocated to sectors that might be sensitive to transition risk, and 35% of banks’ total submitted exposures are towards EU obligors with GHG emissions above the median of the distribution.

The EBA will update the banks’ disclosures following the EBA draft technical standards on Pillar 3 disclosures on climate-change and ESG related risks, including the definition of the green asset ratio (GAR), currently under consultation. Regarding the EU taxonomy classification, EBA states that banks are currently in different development phases to assess the greenness of their exposures.

For more information please visit: EBA website

Jurisdiction: EU

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