The European Banking Authority (EBA), the independent authority which works to ensure effective and consistent prudential regulation and supervision across the European banking sector, announced the results of its initial exercise to map banks’ exposures to climate risk and examining the state of the banks’ own the green estimation efforts. The study found that more work needs to be done by the banks on data collection and disclosure relating to transition strategies and greenhouse gas emissions in their corporate loan portfolios.

The EBA was established in 2011 as part of the European System of Financial Supervision (ESFS), taking over all responsibilities of the Committee of European Banking Supervisors. In addition to providing a single set of harmonised prudential rules for financial institutions throughout the EU, one of the primary functions of the EBA is to assess risks and vulnerabilities in the EU banking sector.

For the climate risk pilot exercise, the EBA evaluated 29 volunteer banks from 10 countries, representing 50% of the EU banking sector’s total assets, which provided raw data on non-SME corporate exposures to EU domiciled obligors, focusing on the identification and quantification of exposures from a climate perspective, particularly relating to transition risk.

According to the EBA, the study indicated that in order to more accurately assess climate risks, banks will need improved disclosure on transition strategies and emissions, with an expanded data infrastructure required that includes client information at activity level.

By industry, the study found that the bulk of the banks’ climate exposures are in sectors including Manufacturing, Electricity, gas, steam and air conditioning supply, Construction, Transporting and storage and Real estate activities, while exposures to high carbon-intensive sectors, such as mining and agriculture, represented less than 5% of the total exposures analysed.

The analysis also examined the banks’ key challenges in employing the EU Taxonomy, the classification system aimed at providing a universal and harmonised definition of economic activities considered as environmentally sustainable, or “green.” The banks indicated that the biggest barrier currently is the state of the availability and standardisation of client data, and the complexity of assessing certain sectors. Most of the banks stated that the ability of their clients to provide taxonomy-based information in 2022 is below 30%. The study also found that the banks are at varying levels of development in applying the Taxonomy.

Click here to view the EBA report.