In ESG era, new green asset ratio could give European banks an edge over rivals
According to market participants, European banks could take an advantage over their American counterparts with a proposed “green asset ratio” aimed at clarifying increasingly important environmental issues to investors.
The European Banking Authority recommended that banks adopt a host asset ratio, or GAR, to show how their business activities are environmentally sustainable, putting the proposal up for consultation.
The ratio would measure the sum of a bank’s climate-friendly loans, advances, and debt securities to total assets. It would be established in accordance with European Union taxonomic rules, launched last year, which categorize economic activities and their effects on climate change. Disclosures under the new measure are expected to begin gradually from 2022.
Gerald Podobnik, chief financial officer of Deutsche Bank AG’s corporate bank, said the move to greater environmental disclosure would help European banks.
“I don’t expect a competitive disadvantage against US banks,” he said by email. “On the contrary, I think Europe is leading the pack here and the United States will follow.”
In the United States, the Securities and Exchange Commission in March sought feedback from business leaders as it developed its own environmental, social and governance oversight plans.
British firm Barclays PLC and French firm BNP Paribas SA were among the top 12 banks in the world financing fossil fuels between 2016 and 2020, providing total loans of $ 146 billion and $ 121 billion, respectively, according to figures from the Dutch non-governmental organization BankTrack. The biggest financier is JPMorgan Chase & Co., based in the United States.
Growing investor concern about how banks and businesses approach environmental issues is likely to make the green asset ratio an attractive metric, said Sam Theodore, independent analyst and senior consultant for Scope Group, an agency. credit scoring and financial analysis.
A common complaint from investors is that the companies they cover, including banks, are not transparent enough when it comes to ESG matters, he said.
“The introduction of an RBM, probably in a few years once climate-related regulatory disclosure becomes mandatory and widespread – which will not be the case until 2022-2023 at the earliest – should in fact increase the attractiveness of EU banks for investors because they will have ‘a hook to hang their hat’ when it comes to ESG, ”Theodore said via email.
He said the EU decision would likely pressure regulators in other jurisdictions to follow suit as investor demands for greater transparency on environmental issues mount.
Indeed, the likelihood that banks elsewhere will follow suit is already part of the European Banking Authority’s outlook on the issue. The EBA is a regulatory agency of the EU.
“We believe that once some banks start to disclose this information in a comparable way, stakeholders can expect similar information from other banks,” said the EBA spokesperson, Franca Rosa Congiu.
Concerns about stiffness
However, there is already concern that the EU’s green taxonomy as a whole, with GAR in particular, is too prescriptive.
Mark Carney, former Governor of the Bank of England and UK government’s climate change adviser, said that while the goals of the EU’s taxonomy are laudable, it would be damaging if it was too rigid to be achievable. He suggested that the EU should take a ’50 shades of green’ approach to allow recognition of companies that are moving from ‘brown’ activities to greener processes.
Maureen Schuller, head of financial sector strategy at ING Groep NV, said the move to RBM was likely to give European banks an edge over their peers, but warned that the ratio would likely exclude some bank assets that could not not easily classified. in terms of environmental effect.
In principle, the GAR would only provide information on assets that are aligned with the taxonomy, she said in an interview. A bank may go to great lengths to “green” its assets, but they would be excluded if they did not comply with the taxonomy.
For example, Schuller noted that a bank financing the transition of a building from the lowest level of energy performance certification to an intermediate level rating would likely contribute to greater energy efficiency gains than financing the transition of a building already fairly effective towards the highest grade, but the former would not be reflected in the GAR.
“When you come to analyze the GAR, you should be aware that some parts are missing and some things are not reflected in it,” Schuller mentionned. A weak or negative “brown” taxonomy would make these efforts more visible, she said.
Still, banks need to make sure they’re prepared, Deutsche’s Podobnik said.
“Since ESG is such a megatrend, any company or region that is at the forefront of developments will be well positioned to take advantage of the opportunities that the transition brings,” he said.