EBA Proposes Simpler ESG Reporting For EU Banks

The European Banking Authority (EBA) has put forth a number of changes to the Pillar 3 disclosure requirements in a major move toward reducing regulatory burden and increasing sustainability transparency in the European banking industry. These suggested modifications prioritize streamlining and clarifying environmental, social, and governance (ESG) risk-related reporting, with a special focus on lightening the load for small and medium-sized banks.

Through its omnibus legislative package, in particular, the new initiatives are intended to be consistent with the European Commission's larger simplification drive. This package intends to lower the cost of compliance and simplify the requirements for sustainability reporting for financial firms throughout the EU. The EBA hopes to adopt a more proportionate and tailored approach to ESG disclosures, taking into consideration a bank's size, kind, and complexity, by aligning with this initiative.

The framework will make disclosure requirements easier for smaller banks, particularly those that are not listed, according to the EBA. The goal of this initiative is to encourage openness and accountability while preventing the sustainability reporting environment from becoming overly restrictive for organizations with few resources or systemic impact.

The EBA is also providing simplifications for bigger organizations, albeit in a more sophisticated way. Lessons learned from recent disclosures and regulatory experience will be used to refine current ESG reporting standards under the new rules. As financial institutions get ready to comply with stricter regulatory standards, this clarification seeks to promote consistency, enhance the quality of the data given, and make sure that banks continue to support EU-wide sustainability objectives.

These events occurred after the EU's revised Banking Package (CRR3) was approved in 2024, which included a number of new reporting requirements related to ESG that will take effect in 2025. One of the most important reforms under CRR3 was the extension of ESG risk disclosure requirements to cover more than simply major financial institutions. All banks, regardless of size, are now required to report on a wide variety of ESG risks, including social and governance concerns as well as physical hazards from climate change and transition risks related to the shift to a low-carbon economy.

By establishing tiered reporting requirements, the new suggestions from the EBA expand upon this regulatory change. The "full set of information" that large firms will be required to give will include more regular and detailed disclosures. These banks, for example, are required to provide semi-annual reports on climate transition risk, with a particular emphasis on the credit quality of exposures by sector, emissions data, and residual maturity. The goal of these thorough disclosures is to provide stakeholders a clear understanding of the climate-related hazards that banks face and how they are addressing them.

In contrast, other listed businesses and significant subsidiaries will be required to submit a "simplified set of information" that includes yearly rather than semiannual reporting. Only the simplest banks, classified as small and non-complex institutions (SNCIs), will be required to reveal an "essential set of information." This tiered approach guarantees proportionality in the distribution of ESG obligations throughout the industry and helps lessen reporting weariness.

The mandate that banks disclose their exposure to environmental physical and transition risks, as well as social and governance risks, is a crucial addition under the new regulations. Banks will also be required to disclose their overall exposure to businesses in the fossil fuel industry. In addition, they must demonstrate how ESG risks are integrated into their risk management systems, governance structures, and overall business strategy.

The EBA is emphasizing the necessity for big banks to publish their Green Asset Ratio (GAR), which is a crucial measure of how well their portfolio aligns with the EU Taxonomy regulation's definition of sustainable activities. The proposed regulations aim to ensure full harmonization between the GAR and the EU's sustainability taxonomy, fostering consistency and comparability in ESG performance reporting among institutions.

The EBA is also looking at the possibility of lowering the frequency of some reporting obligations for big banks depending on materiality, taking into account that some disclosures may become less relevant over time or under specific circumstances. This demonstrates a more adaptable and realistic regulatory mindset, making sure that the data acquired is worth the cost of compliance.

In order to obtain feedback and make sure that the ultimate framework addresses the needs of stakeholders, the EBA has opened a public consultation on the suggested changes to ESG reporting. Financial institutions, industry associations, and other stakeholders are invited to provide input by August 22, 2025. The consultation process will be essential to improving the framework and making sure that the final guidelines strike the right balance between transparency, practicality, and regulatory efficiency.