EBA Launches ESG Dashboard To Track Climate Risks

In a major development with the purpose of enhancing monitoring of climate-linked financial risks, the European Banking Authority (EBA) has introduced a new Environmental, Social, and Governance (ESG) dashboard. The dashboard is meant to facilitate benchmarking and ongoing tracking of climate risks across European Union (EU) and European Economic Area (EEA) banking industries.

The dashboard is constructed using data published by banks under Pillar 3 ESG disclosure requirements and provides a holistic overview of the sector's exposure to both physical and transition climate risks. It presents a selection of key indicators ranging from measurements of green financing activities in line with the EU Taxonomy to internal definitions of green finance used by specific institutions.

The publication of the dashboard comes in the wake of increasing worries regarding banks' exposure to climate transition risks. The EBA says that banks in the EU and EEA have high exposure to corporates in industries that are major contributors to climate change. Statistics from the dashboard indicate that, as of June 2024, such exposure was higher than 70% in most nations, averaging 61% in the entire region. While this represents a slight increase over the 64% reported at the close of 2023, the bank exposure is still alarmingly high, indicating that banks remain significantly exposed to high-carbon sectors.

The EBA stated that exposure levels may pose significant risks if firms in these sectors are affected by emerging sustainability-related policy initiatives, the necessity for technological progress, or changes in consumer behavior. These drivers may affect the financial well-being of borrowers and by definition the risk profiles of banks lending to them. The conclusions highlight the imperative for banks to anticipate the consequences of an evolving economy in which climate factors are progressively shaping investment and operating decisions.

As compared with the substantial levels of transition risk, exposure to physical risk is relatively modest. The dashboard reveals that, in the majority of countries, the average proportion of banks' exposures to regions with high physical climate risks — that is, extreme weather, rising seas, or other environmental risks — is below 30%. This implies that, at least from a geographical perspective, European banks are relatively insulated from immediate, large-scale physical climate risks. Nonetheless, the EBA did not minimize the need to constantly keep physical risks under review, particularly in light of the increasing number and intensity of climate-related natural disasters.

The dashboard also illuminates the status quo of green financing in the sector through the quantification of the Green Asset Ratio (GAR). As of mid-2024, the EU and EEA average loan GAR was at 6%, a slight improvement from 5.8% at the end of 2023. The green asset ratio is a measurement of the share of a bank's loans and investments that fall under the EU Taxonomy criteria as environmentally sustainable. The low ratio shows that a very few banks' portfolios are currently subject to the very high sustainability requirements.

As per the EBA, the limited growth in GAR is a reflection of the fact that the overall economy remains in its nascent stages of transformation towards sustainability. Most economic activities are yet to prove full compliance with the Taxonomy's standards and, therefore, it is difficult for banks to substantially expand their green financing portfolios in the short term. However, the modest rise in GAR indicates that efforts are being made, though slowly, towards more integration of sustainability principles into banking operations.

The EBA has pledged to update and refine the dashboard's indicators on a regular basis, making it a dynamic tool that adapts to the fast-evolving ESG environment. The project is one of several initiatives by European regulators aimed at promoting increased transparency and accountability regarding climate risks in the financial system, enabling banks, investors, policymakers, and the public to better comprehend and react to the threats of climate change.

The launch of the ESG dashboard represents a pivotal moment in the EU's approach to aligning financial systems with its climate goals. By making available detailed, standardized information on banks' climate exposures and green financing activities, the EBA seeks to enable more informed decision-making and spur the sector's transition to a more sustainable future.