In ESG age, new green asset ratio could give European banks an edge over rivals

European banks could take the edge over their US counterparts with a proposed “green asset ratio” to enlighten investors on increasingly important environmental issues, according to market participants.

The European Banking Authority has recommended that banks adopt a host asset ratio, or GAR, to show how their business activities are environmentally sustainable, by submitting the proposal 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 compiled in accordance with the European Union’s 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 investment bank, said the move towards 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 advice from business leaders as it drafts its own environmental, social and governance oversight plans.

Better transparency

British firm Barclays PLC and France’s BNP Paribas SA were among the top 12 global banks financing fossil fuels between 2016 and 2020, making total loans of $ 146 billion and $ 121 billion, respectively, according to figures from the Netherlands-based non-governmental organization BankTrack. The biggest financier is the American company JPMorgan Chase & Co.

Growing investor concern about how banks and businesses are approaching 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 rating 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 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 indeed 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 more transparency on environmental issues increase.

Indeed, the likelihood of other banks following 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 manner, stakeholders can expect similar information from other banks,” said the EBA spokesperson, Franca Rosa Congiu.

Concerns about stiffness

However, there are already concerns that the EU’s green taxonomy as a whole, as well as RBM in particular, is too prescriptive.

Mark Carney, former Governor of the Bank of England and UK government’s climate change adviser, has said that while the goals of the EU’s taxonomy are laudable, it would be damaging if it were 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 a 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 aligned with the taxonomy, she said in an interview. A bank may go to great lengths to “green” its assets, but these 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 the energy performance certificate to an average level would likely contribute to greater energy efficiency gains than when it finances the transition of a building already quite effective towards the higher level, 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 noted. 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 in a good position to take advantage of the opportunities that the transition brings,” he said.