EU Banks' Climate Disclosures in Pillar III Reports Bring Impact of Climate Change Closer to Home - Key Insights

In this commentary, we address key takeaways from our series of three forthcoming commentaries that will discuss the quantitative data of environmental, social, and governance (ESG) disclosures in European banks' (the banks) Basel 3 Pillar III reports. The analysis is based on a sample of 16 large European banking groups across nine countries as follows: Part I (Transition Risk), Part II (Physical Risk), and Part III (Mitigation/Adaptation).

Key highlights:
-- The level of quantitative and qualitative information provided is sizeable; however, large EU banks in our sample were able to meet new disclosure requirements.
-- The data does not reflect mitigants in place; however, we consider it does provide a high-level view of where challenges might lie ahead, raising questions on which issuers are more prepared or who can withstand increased shocks and pressure.
-- Our high-level analysis highlights how an issuer might appear more vulnerable to climate change in terms of concentration of either sector, maturity, credit quality of exposures, or a combination of these through the lens of transition or physical risk.
-- We positively note the requested data brings clarity on time horizons, as banks' exposures to the selected sectors are broken down by buckets of residual maturities. It is therefore possible to quantify the proportion of maturities that are short term, medium term, and longer term--longer time horizons being associated with higher climate risk compared with now.
-- More disclosures are required with data from end-June 2024 (not available yet) that include the banks' scope 3 emissions and the alignment metrics on relative scope 3 emissions, which should give more insight into future financed emissions considering banks' clients transition plans.

"We acknowledge data limitations; however, we think that these new sets of climate-related data available in large European banks' Pillar III reports already provide a better understanding of climate risk for banks absent mitigants", said Vitaline Yeterian, Senior Vice President at Morningstar DBRS. "The objective is to assess the various angles climate change can affect traditional categories of the banks' financial and nonfinancial risks, such as credit, but also reputational, market, or operational risks (including compliance)."