Banks grapple with GAR objectives

Tue 13 Sep 2022

In force since 1 January 2022, the European Union’s Taxonomy regulation aims to support the market for green finance. More specifically, greater transparency in the market will help prevent greenwashing by providing information to investors about the environmental performance of assets and economic activities of financial and non-financial information. 

For the banking sector, the target is to measure the share of financing allocated to sustainable economic activities by publishing a Green Asset Ratio (GAR). However, in a recent analysis* of the first GARs issued by the European Union’s 11 leading banks, the absence of information means banks have had no choice but to estimate a company’s level of green finance. These estimates have been taken into account in the ratio published mainly on a voluntary basis by the banks reviewed.

Such voluntary ratios reflect the broadening of the scope of eligible assets by including the financing of companies identified as subject to the Non-Financial Reporting Directive (NFRD) or by having an EU economic activity classification through a NACE code listed in the delegated act on climate targets.

Areas of interpretation remain

The methodology for calculating the GAR is governed by Article 8 of the Taxonomy regulation. Despite the additions made by the European Commission’s FAQ of 2 February 2022, some areas of interpretation remain. For example, in terms of the determination of covered assets, there were varying levels of detail in the information published, with 27 % of the banks in the panel not clearly indicating the proportion of exposures covered by the ratio in percentage terms. In comparison, 9 % do not provide detailed information on items excluded from the assets covered. In terms of exclusions applied, 73% of the banks in the panel provide detailed information on items such as derivatives, interbank demand loans or non-NFRD exposures.

In applying eligibility criteria, 91% of banks in the panel provide details on the nature and scope of collateralised real estate loans, while 55% provide similar information on the work loans considered eligible and 64% on the financing of vehicles deemed eligible.

There was also heterogeneity in the eligibility criteria applied. For example, some banks considered the loans to individuals eligible. Others, in the strict application of the text, considered them ineligible because they were granted before January 1, 2022. In addition, some banks considered loans to local authorities ineligible whereas others analysed the eligibility criterion according to the nature of these loans, for example the financing of social housing. Most banks included in eligible assets loans to households, guaranteed by a home loan or a mortgage. More rarely included were loans for home improvement or renovation due to a more complex audit trail.

Future challenges

The challenge for banks in the coming years will be to access relevant information on the eligibility and then the alignment of their financing.

Despite the strengthening of publication obligations through the upcoming application of the Corporate Sustainability Reporting Directive (CSRD) to replace the NFRD, it will nevertheless remain necessary for banks to adapt their information systems to produce reliable information efficiently and to improve the identification of so-called “earmarked” financing whose purpose is known precisely. Finally, the transformation of customer paths to produce reliable and efficient information and organise the collection of new documents needed for taxonomy alignment analysis, such as an Energy Performance Declaration when financing real estate, will be essential.

*For more information, please refer to Les cahiers sectoriels de la taxonomie #1 : Secteur Banque (available in French).