In a significant development, the European Union’s banking watchdog stated, starting from next year banks in the Eurozone would have to publish a pathbreaking “green asset ratio” (GAR) as a core measure of their climate-friendly business activities.
With investments in green sustainable energy increasingly gaining traction, regulators want investors to get accurate and reliable information on a bank’s exposures to climate change, since weather events, including wildfires, storms and rising sea levels affect the value of their assets and liabilities.
In a statement, the European Banking Authority (EBA) said, GAR 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 ratio will provide investors a quick way to figure out which assets are environmentally sustainable.
The EBA went on to say, “many stakeholders have a legitimate interest in the physical and transition risks that banks are exposed to from climate change”.
Although few lenders are expected to reach 100%, lenders are likely to face investor-pressure to show what steps they are taking to increase their GAR over time.
Starting from 2022, the GAR would be published in a bank’s annual report based on data up to Dec. 31, 2021.
Additionally, banks will also have to publish three other indicators showing the extent to which fees from major trading operations, advisory services, and off-balance sheet exposures are derived from climate-friendly activities.