Europe’s biggest banks warn of major flaw in key ESG metric

It’s meant to be the ultimate metric for gauging how clean European banks are. But some in the industry say it will be flawed from the get-go.

The European Union’s planned Green Asset Ratio, intended to reveal how much a bank lends to climate-friendly companies and projects, will offer a distorted picture of reality, according to a Bloomberg survey of some 20 major European banks. The firms, which rely on clients for the data they need to calculate the ratio, point out that many small or international companies simply won’t provide it.

While it’s easier for lenders to blame bad data than overhaul their loan books, their concerns highlight a key hurdle on the road to greening the financial industry. The findings in the Bloomberg survey, the first in a series on how Europe’s banks are handling the region’s developing climate regulation, once again show that climate risk needs to be measured accurately before it can be tackled.

Europe is taking a more aggressive approach than the U.S. and other jurisdictions on climate change and will ultimately penalize financial firms that turn a blind eye to global warming. Banks that have long touted their green credentials are now being told to back up those claims with hard data. Lenders perceived to be laggards risk losing investors and depositors.

The European Banking Authority, which mapped out the Green Asset Ratio, says the metric will help compare banks both in terms of their exposures as well as their sustainability strategy and how they plan to mitigate climate-change-related risks. The EBA “strongly believes” that the availability, quality and exchange of data can be improved with the right regulatory framework and incentives, a spokeswoman for the Paris-based authority said by email. Banks will also be allowed to use estimates for the environmental impact of their clients, she said.

The EBA unveiled its first estimate of how green banks’ loan books are in May, revealing that lenders with half the European Union’s total banking assets had an average Green Asset Ratio of just 7.9%. The metric forms a key part of new standards that the EBA says provide comparable quantitative disclosures on climate-change related risks. It identifies assets that are environmentally sustainable under the EU’s taxonomy.

But banks surveyed by Bloomberg say the metric could offer a misleading snapshot, without better data. UBS Group AG was among international lenders to say it faces difficulties getting data from corporate clients that aren’t subject to reporting requirements because they’re based outside Europe. Several of the banks surveyed also noted that many small and medium-sized companies, which make up the backbone of Europe’s economy, won’t be obliged to provide lenders with environmental data.

Germany’s Commerzbank AG said the green ratios of some banks might look lower due to the specialized lending they do, or because of the regions to which they cater.

The timing

Banks also voiced frustration over the EU’s decision to implement the Green Asset Ratio at the end of 2022, which is a year before the bloc is due to update wider corporate reporting requirements to include more environmental data. Another concern is that the ratio alone doesn’t adequately acknowledge efforts to provide credit to companies that need support in transitioning to a low-carbon future, even if such loans aren’t technically green.

The EBA says its schedule for publishing the ratio is “reasonable and appropriate given the content and timeline of the EU climate target plans, and proposes a phase-in approach for these disclosures.” Banks should be transparent on their plans to help borrowers adapt to a low-carbon economy and the ratio will help foster transparency, its spokeswoman said.

“A portfolio with a limited Green Asset Ratio but also few harmful engagements, a sustainability neutral portfolio, will initially be difficult to differentiate,” said Svenska Handelsbanken AB. “Over time we expect that the Green Asset Ratio combined with disclosure of the harmful activities will provide insights and comparability.”

And there are already signs that lending practices are changing. Swedbank AB, another of Sweden’s big banks, has “stopped all new financing for unconventional fossil fuels as well as new financing for the prospecting of new oil and gas fields,” Chief Executive Jens Henriksson said. Only if a company “can supply and demonstrate a transition plan for its entire value chain that aligns with the Paris Agreement” will it stay on the bank’s books.

“You need to understand as a bank that you need to take responsibility for what you do,” he said.

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