European green taxonomy eligibility ratios in the banking sector

Mon 13 Nov 2023

The implementation of the European Union’s ‘Taxonomy’ regulation, which integrates two climate objectives, was carried out on 1 January 2022 through the ‘Climate’ Delegated Act released in April 2021. In line with this, the banking sector has been provided with corresponding regulations, allowing banks to measure the portion of their financing dedicated to sustainable economic activities by disclosing their ‘Green Asset Ratio’ (GAR). The publications for 2022 and 2023 concentrate on the concept of the eligibility ratio, which signifies the extent to which activities align with these regulations. However, the 2024 publication will focus towards calculating the alignment ratio, encompassing evaluations of exposures to effectively sustainable activities.

This year’s latest publication introduces several noteworthy new features in the European green taxonomy. These features include provisions for corporate loans and lending to households, as well as the incorporation of ESMA and AMF recommendations, along with other additional information.

At Mazars, we have undertaken a comprehensive assessment of the 2023 publications of “eligible” GAR within a select group of 12 prominent banks operating within the European Union. This exclusive panel of banks includes industry giants such as BNP Paribas, BPCE, Crédit Agricole, Crédit Mutuel, Deutsche Bank, ING, Intesa, La Banque Postale, Santander, Société Générale, UBS, and UniCredit. Our thorough analysis aims to allow valuable insights into the green financing landscape and the progress made towards sustainable practices within the banking sector.

Treatment in the GAR numerator of exposures to companies subject to NFRD

According to the collected data, approximately 50% of the banks surveyed indicate 50% of banks indicate that the method they used to collect eligibility ratios for counterparties is subjected to the NFRD. Out of the selected banks, only two explicitly stated that they relied on data providers to collect the ratios of their counterparties under the NFRD. A single bank, on the other hand, revealed that it adopted a mixed approach, utilising both data from the Bloomberg supplier and conducting additional research to identify material exposures.

Another bank chose to take matters into its own hands and collected the ratios themselves by utilising URDs and management reports from companies subject to the NFRD. However, one bank faced limitations in data collection and, unfortunately, was not able include eligible exposures to companies subject to the NFRD in the numerator of its mandatory ratio.

Information on exposure to fossil gas and nuclear power generation activities

Nearly half of the banks have published qualitative information on these exposures, and amongst these, all considered themselves to be exposed to entire list of nuclear and fossil gas activities.

Due to absence of information published by their counterparties, none of the banks were able to publish quantitative information mandated under the complementary delegated act.

Moving towards best practice

Numerous findings have demonstrated that banks are pay attention to the recommendations of AMF and ESMA regarding the presentation of the GAR. While embracing the best practice, banks remain commitment to adopting them in accordance with 2022 publications.

However, despite these efforts, 83% of banks have stopped publishing a ‘voluntary’ eligibility ratio alongside the ‘mandatory’ ratio. This shift is primarily attributed to the unavailability of eligibility ratios published by non-financial companies subjected to the NFRD in 2022. In the previous year, only two banks managed to estimate and publish their voluntary ratio due to data limitations. These banks exercised caution to avoid any confusion between the voluntary ratios and the two GARs.

Contrary to the discrepancies observed in the first year, in the second-year alignment practices regarding denominator were used to calculate various ratios. The practices involved calculating both eligible and non-eligible assets in comparison to the total assets. It also involved exclusion of numerator and denominator in relation to the total asset. Banks have also supplemented paragraph related to European Green Taxonomy by emphasising on the details pertaining to sustainability while granting and investing.

Conclusion

In the coming years, banks are expected to face two major operational challenges when working towards the production of the alignment ratio. Firstly, collecting alignment ratios for companies subject to the NFRD for both sales and investments, as well as unrestricted and assigned loans, will pose a significant obstacle. Secondly, conducting an alignment analysis of financed assets, such as real estate, vehicles, and dedicated financing, based on the technical criteria of the Taxonomy will require careful handling of data quality and interpretation.

The landscape of sustainability-related texts, including those related to the taxonomy, is continually evolving and will persist for years to come. In relation to taxonomy, currently consultations are underway to revise the list of activities for the first two climate objectives, which will allow for the inclusion of equipment manufacturers, aeronautics, and climate risk consulting.

On a final note, as the implementation of the other four taxonomy objectives progresses, it will bring new activities into the scope of analysis, with one significant addition being the ‘transition to a circular economy’.