# What Banks Need to Prepare for EBA Pillar3 Disclosure of ESG Risks Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2021-10-19 Category: BANKING Category URL: https://financedigest.com/category/banking Meta Title: EBA Consultation Paper: Impact on Banks Meta Description: Learn how the EBA's draft implementing technical standards aim to enhance disclosures on environmental, social, and governance risks for financial URL: https://financedigest.com/what-banks-need-to-prepare-for-eba-pillar3-disclosure-of-esg-riskshtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/modern-building-business-architecture-of-singapore-sbi-301090690-1736837545592-compressed.jpg) - **Overview of EBA Consultation Paper** The European Banking Authority (EBA) published a consultation paper on draft implementing technical standards (ITS) on Pillar 3 disclosures on Environmental, Social and Governance (ESG) risks. The draft ITS put forward comparable disclosures that show how climate change may exacerbate other risks within institutions’ balance sheets, how institutions are mitigating those risks, and their green asset ratio on exposures financing taxonomy-aligned activities, such as those consistent with the Paris agreement goals. One of the core objectives of integrating ESG disclosures as part of pillar 3 is to establish comparability on quantitative impact of physical and transition [climate risks, it also includes quantitative disclosures on institutions’ mitigating actions supporting their counterparties in the transition to a carbon neutral economy and in the adaptation to climate change](https://www.financedigest.com/exclusive-world-bank-seeks-more-funds-to-address-climate-change-other-crises-document.html "Exclusive-World Bank seeks more funds to address climate change, other crises -document"). EBA requires [banks to report](https://www.financedigest.com/how-banks-can-avoid-regulatory-reporting-mistakes-with-a-good-dose-of-automation.html "HOW BANKS CAN AVOID REGULATORY REPORTING MISTAKES WITH A GOOD DOSE OF AUTOMATION") ESG risks as per suggested templates. ![climate specific data segments are to be newly sourced and loaded into institutions risk data](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/image1-1736837545498-compressed.jpg) - **How Does it Impact [Financial Institutions](https://www.financedigest.com/what-the-future-holds-for-financial-institutions-in-2023.html "What the Future Holds For Financial Institutions in 2023") ?** Inclusion of ESG [risks as part of pillar3 disclosures has an impact](https://www.financedigest.com/russia-could-hike-rates-in-2023-if-inflation-risks-have-big-impact-cenbank.html "Russia could hike rates in 2023 if inflation risks have big impact -cenbank") across capital requirement regulatory value chain right from data sourcing till regulatory reporting. Since most the granular [climate specific data segments are to be newly sourced and loaded into institutions risk](https://www.financedigest.com/institutional-investors-back-shell-board-lawsuit-over-climate-risk.html "Institutional investors back Shell board lawsuit over climate risk") data repository for calculations & aggregation, it is mandatory to ensure data quality and firms must periodically review relevance and validity of DQ processes. From risk taxonomy alignment perspective , considering cross cutting nature of ESG risks, orchestration of regulatory mandates like pillar3 disclosure comes up with [challenges on risk data](https://www.financedigest.com/open-data-represents-the-biggest-challenge-to-banks-in-a-generation.html "Open data represents the biggest challenge to banks in a generation") governance, engagement with stakeholders across business units, complexity in transforming/linking climate change metrics to financial impact and in ensuring consistent understanding of regulatory obligation across different business units. Based on our conceptual understanding of EBA regulatory consultation on ESG risks we feel that below [core components of CRR business architecture are impacted and requires institutions to assess and develop systems and processes to meet expected](https://www.financedigest.com/ericssons-quarterly-core-profit-misses-expectations.html "Ericsson’s quarterly core profit misses expectations") disclosures. ![Banks must review existing risk management](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/image2-1736837545508-compressed.jpg) - **What [Banks Need](https://www.financedigest.com/knowing-your-customers-needs-is-essential-for-banking-innovation.html "KNOWING YOUR CUSTOMERS’ NEEDS IS ESSENTIAL FOR BANKING INNOVATION") to do to Implement Proposed Regulation** [Banks must review existing risk management](https://www.financedigest.com/strategies-banks-use-to-manage-liquidity-risk.html "Strategies Banks Use to Manage Liquidity Risk") & regulatory compliance capabilities and assess core capabilities which requires potential enhancement to comply with pillar3 reporting of ESG risks and to ascertain if there is a need to develop new capabilities. We feel that below are core capabilities that requires consideration & enhancement to navigate the path of successfully complying with Pillar3 disclosure of ESG risks. **Risk Data Acquisition:**[Banks will need](https://www.financedigest.com/the-bank-of-me-why-banks-need-to-be-totally-customer-centric.html "The bank of me – why banks need to be totally customer centric") to formulate core group that focuses on identifying risk data requirements to analyze, measure and disclose physical risks and transitions risks. As far as pillar 3 templates are concerned [banks must report granular climate risk](https://www.financedigest.com/inflation-trumps-financial-risks-as-central-bank-tightening-set-to-continue.html "Inflation trumps financial risks as central bank tightening set to continue") data points (both quantitative and qualitative metrics) like GHG emissions by sector, asset class, energy efficiency of collaterals, exposures classified to climate change mitigation and adaptation activities for each of financial product lines. Firms need to conduct an assessment exercise to understand data points, data sources and availability and perform a gap analysis to know to address [challenge of identifying right data sources either by engaging with transition risk](https://www.financedigest.com/5-challenges-to-overcome-in-governance-risk-and-compliance-magazine.html "5 Challenges to Overcome in Governance, Risk and Compliance-Magazine") /physical risk data providers in markets or put in place structured road map to source required data segments. **Taxonomy Alignment of Exposures:**  EBA advises firms to [understand and adhere to EU Taxonomy Regulation to classify banking and trading](https://www.financedigest.com/a-brits-guide-to-understanding-commodity-trading.html "A Brit’s Guide to Understanding Commodity Trading") book exposures and follow economic activity-based climate classification. Institutions are required to formulate processes & tools to align with EU climate [risk taxonomy to classify exposures as per climate mitigation](https://www.financedigest.com/mitigating-operational-risk-through-centralising-reconciliation.html "MITIGATING OPERATIONAL RISK THROUGH CENTRALISING RECONCILIATION") & adaptation. **Climate [Data Transformation](https://www.financedigest.com/how-data-governance-as-a-service-can-transform-the-financial-sector.html "How Data Governance-as-a-Service can transform the financial sector") & Aggregation:** Pillar3 disclosure requirements necessitate disclosure at various granularities including by asset type, economic activity, Nature of assets, Energy Efficiency of collateral, carbon emissions. It is important for [firms to assess risk](https://www.financedigest.com/aon-announces-agreement-to-acquire-risk-management-firm-creating-a-comprehensive-cyber-risk-management-advisory-group.html "Aon announces agreement to acquire risk management firm, creating a comprehensive cyber risk management advisory group") data aggregation and reporting capabilities to tackle necessary data transformation requirements of pillar3 disclosures and uplift data framework components to handle numerous unstructured climate data & convert them to usable formats , Increased DQ obligations. Firms must ensure on flexibility of risk aggregation framework to aggregate and breakdown of lending & [trading](https://www.financedigest.com/wto-sees-subpar-2023-trade-growth-with-multiple-risks.html "WTO sees “subpar” 2023 trade growth with multiple risks") book exposures against climate risk. **[Climate Risk](https://www.financedigest.com/financial-risks-of-climate-change-overplayed-senior-hsbc-banker-says.html "Financial risks of climate change overplayed, senior HSBC banker says") Measurement Methodology:** As required for template4 disclosures ‘’ _firms that are not yet estimating their scope 3 emissions shall disclose information on their plans to implement methodologies to estimate and disclose this information”._ Firms must start agreeing with counterparties on methodologies to [gather their climate risk](https://www.financedigest.com/flu-experts-gather-with-h5n1-risk-on-the-agenda.html "Flu experts gather with H5N1 risk on the agenda") mitigation road map & support counterparties’ transition toward taxonomy alignment. It is essential to [understand client economic activities that is a pre-requisite to accurately map it to taxonomy & determine level](https://www.financedigest.com/understanding-the-different-levels-of-maturity-in-travel-and-expense-management.html "Understanding the different levels of maturity in travel and expense management") of taxonomy aligned exposure. Since Green Asset Ratio will enable comparability among institutions, it is important to agree with clients on how sooner they can start sharing information on their climate risk mitigations and future project road map [plan and plug in changes](https://www.financedigest.com/exclusive-olympics-paris-2024-plans-games-relay-changes-fewer-torches-source.html "EXCLUSIVE-Olympics-Paris 2024 plans Games relay changes, fewer torches-source") to reflect on GAR ratio. **Risk Disclosures & Review:** Current risk reporting [landscape need](https://www.financedigest.com/what-needs-to-happen-to-improve-the-landscape-for-smes-trying-to-access-finance-options-in-the-uk.html "What needs to happen to improve the landscape for SMEs trying to access finance options in the UK") to be reviewed for scalability, flexibility, and consistency to report additional climate metrics included in EBA templates. - **Conclusion** It is evident that  regulators across globe   will come up with stringent  regulatory requirements regarding disclosure  of ESG [risks enabling investors](https://www.financedigest.com/stocks-rise-after-bank-sale-fuels-investor-risk-appetite.html "Stocks rise after bank sale fuels investor risk appetite") and stakeholders with comparability and transparency   of  sustainability performance of institutions. This will result in  institutions   being faced with regulatory pressure  across jurisdictions & creates strong need for effective compliance.  It is critical  for [banks to review and  perform assessment on possible pathways in which climate risk](https://www.financedigest.com/governments-and-central-banks-risk-inflation-bank-of-england-has-done-its-bit-now-the-politicians-turn.html "Governments and central banks risk inflation, Bank of England has done its bit, now the politicians’ turn") specific regulatory domain would evolve.       Capabilities like Alignment of [banking book & trading](https://www.financedigest.com/britains-digital-banks-need-support-amid-banking-turmoil-trade-body.html "Britain’s digital banks need support amid banking turmoil – trade body") book exposures with EU taxonomy will  be  foundational component &  it could obviously be leveraged for   any other upcoming  EBA  regulation on ESG risks.   We recommend that banks proactively assess [risk management](https://www.financedigest.com/managing-corporate-currency-risk-the-cfos-balancing-act.html "Managing Corporate Currency Risk: The CFO’s Balancing Act") & compliance capabilities and be better prepared   when final EBA regulations come into effect to benefit from competitive advantage. **_Author’s Bio_** _Sudalaimuthu Gurusamy is a Domain Consultant with the Risk Management practice of the [Banking and Financial](https://www.financedigest.com/financial-crime-is-the-chink-in-the-banks-armour.html "Financial crime is the chink in the banks’ armour") Services (BFS) business unit at Tata Consultancy Services (TCS). During his 13 years of experience in consulting, he has worked on several global [risk and compliance engagements as Risk Domain Consultant/Senior Business](https://www.financedigest.com/aon-assists-freddie-mac-to-reach-5bn-risk-transfer-milestone-for-u-s-mortgage-credit-business.html "AON ASSISTS FREDDIE MAC TO REACH BN RISK TRANSFER MILESTONE FOR U.S. MORTGAGE CREDIT BUSINESS") Analyst._ _A GARP certified Financial Risk Manager™, Sudalaimuthu holds a master’s degree in Business Administration from the Anna University, Chennai, India. His risk consulting [experience revolves around Credit risk Transformation](https://www.financedigest.com/transforming-the-banking-experience-to-be-mobile-first-and-people-centric.html "Transforming the banking experience to be mobile-first and people-centric"), Risk Data Transformation Initiatives, BCBS 239, BASEL II, BASEL III, Liquidity risk management, Loan loss forecasting and provisioning, and risk regulatory reporting. Recently he is working on developing risk solutions to cater to emerging risks domains including [operational resiliency](https://www.financedigest.com/2021-predictions-operational-resilience-takes-center-stage.html "2021 Predictions: Operational Resilience Takes Center Stage") & climate risk._ --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---