Banks in the European Union would have to publish a groundbreaking “green asset ratio” (GAR) as a core measure of their climate-friendly business activities from next year, the EU’s banking watchdog proposed on Monday.
As the trend in sustainable investing gathers pace, regulators want investors to get more reliable information on a bank’s exposures to climate change as storms and other weather events affect the value of their assets and liabilities.
The European Banking Authority (EBA) said the ratio, put out to formal public consultation on Monday, will measure the amount of climate-friendly loans, advances and debt securities compared to total assets on a lender’s balance sheet to reach a percent figure.
“I believe it’s the first time regulators are asking for a green asset ratio,” said Piers Haben, EBA’s director of banking, markets, innovation and consumers.
“The numbers may well be single digit for banks at first and that’s why context will be important. When a bank talks about where it wants to be in 2030, that is going to be really interesting on the green asset ratio.”
The new EU “taxonomy” would be used to define which assets are environmentally sustainable.
EBA said that many stakeholders have a legitimate interest in the physical and transition risks that banks are exposed to from climate change.
Banks are likely to face pressure from investors to show what steps they are taking to increase their GAR over time, though few lenders are expected to reach 100%.
The watchdog was responding to a request from the EU’s executive European Commission on how to implement upcoming requirements on climate-related disclosures by banks.
The GAR would published in a bank’s annual report, starting from 2022 based on data up to Dec. 31, 2021.
Banks will also have to publish three other indicators showing the extent to which fees from advisory services, major trading operations and off-balance sheet exposures are derived from climate-friendly activities.