Shearman & Sterling LLP | FinReg | European Banking Authority Publishes Final Draft Implementing Technical Standards on Prudential Disclosures of ESG Risks
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  • European Banking Authority Publishes Final Draft Implementing Technical Standards on Prudential Disclosures of ESG Risks

    The European Banking Authority has published final draft Implementing Technical Standards on Pillar 3 prudential disclosures of environmental, social and governance risks under the EU Capital Requirements Regulation. The ITS specify the type and format of information to be published in accordance with the new CRR requirements on disclosure of prudential information on ESG risks.

    The new CRR requirements come into force on June 28, 2022 and require "large institutions" with securities traded on an EU regulated market to disclose information regarding their ESG risks. For these purposes, a large institution is defined to be either: (i) a global systemically important institution (as defined under CRR); (ii) an other systemically important institution (as defined under the revised Capital Requirements Directive); (iii) one of the three largest institutions by total asset value in the Member State in which it is established; or (iv) a firm that has a total asset value equal to or greater than €30 bn. Disclosure will be annual in the first year, meaning many firms' first reports will only need to be made at the financial year end in December 2022, and semi-annual thereafter.

    The ITS will require the following information to be disclosed:
    • Quantitative disclosures on the institutions': (i) climate change transition risk, i.e. the risk of losses from negative financial impacts that may arise from the sustainable economy transition on, for example, non-financial corporates that operate in sectors highly exposed to climate change; (ii) climate change physical risk, i.e. exposures in the banking book to non-financial corporates and loan collateral exposed to chronic climate-related hazards; and (iii) mitigating actions being taken to align institutions with climate change mitigation and adaptation in accordance with the EU Taxonomy Regulation.
    • Qualitative disclosures on the ESG risks that may manifest on institutions' balance sheets from ESG risks to their counterparties. Disclosures should be made regarding the institutions' governance, business model and strategy and risk management strategies for ESG risks.

    The ITS have been designed in alignment with various other EU and international ESG initiatives, including the Financial Stability Board's Task Force on Climate-related Financial Disclosures and the EU's Taxonomy Regulation. The draft ITS will apply to a narrower subset of firms than the disclosure obligations regarding non-financial information under the EU Taxonomy Regulation. The EBA hopes that the ITS will go further than existing non-financial ESG disclosure measures by establishing mandatory, consistent and standardized disclosures which are more consistent and comparable.

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