Gaps Persist in Pillar III Disclosure Reports

Study overview

In this study, PwC  examines how credit institutions in Europe have implemented EBA standards in the disclosure reports for the first time. The focus is on the requirements contained in Article 449a CRR (Capital Requirements Regulation) in conjunction with the Implementing Regulation (EU) 2022/2453 and its guidelines for the disclosure of ESG (Environmental, Social, Governance) risks in Pillar III.

Little transparency for “S” and “G” risks

The study found that the disclosure reports of some credit institutions lack transparency with respect to their qualitative information concerning risks arising in the Social (“S“) and Governance (“G”) areas. These risk categories are often consolidated in an upstream section (28%) or in conjunction with environmental risks (“E”).

Almost two thirds of the institutions (72%) opt to treat the various qualitative sections separately. In these cases, the content is arranged more clearly and can be more easily assigned thematically.

96% make qualitative disclosures regarding environmental risks for the business model, strategy, governance and risk management. 96% also make disclosures regarding social risks – although to a much lower extent than the disclosures for environmental risks.

92% provide qualitative disclosures on governance risks. According to the study, the governance aspect is least developed in terms of content and in some cases only comprises a few sentences.

56% publish the information as free text, while 20% follow the structure of EBA ITS. Almost one quarter (24%) combine both approaches – although these presentations are often unclear and difficult to understand.

PCAF method for energy certificates (EPC labels) insufficient

The energy certificate (EPC label) is growing in importance as a criterion for the awarding of loans secured on property. Nevertheless, the study found that many establishments have difficulties with the procurement, assessment or reporting of labels. 

Eight of 25 institutions use the PCAF (Partnership for Carbon Accounting Financials) approach to prepare their energy certificates. However, whether this is a suitable method is disputed. Only seven institutions indicate that they use external EPC data. Besides, the use of estimates for EPC labels leads to discrepancies for the reported data.

Risk assessment of physical risks requires precise geographical information

The lack of geographical distributions and country allocations for the risk items leads to significant differences in the disclosures on physical risks. This is also reflected by the very large datasets in some cases and makes it difficult to accurately assess risks.

According to the study, 14 institutions choose not to break down their banking books by geographic region. Just 7 institutions perform a differentiated regional breakdown of physical risks.

Deficit for activities outside the GAR

In some reports, activities undertaken to curb climate risks are incomplete, contain insufficient detail or are not discussed at all. It is therefore difficult to assess their effectiveness. Just 24% provide a detailed explanation of the risk-reduction measures in notification sheet 10. 48% of institutions make no disclosures whatsoever. This indicates potential data gaps and the limited availability of data on sustainable instruments. Just 24% of institutions discuss why certain engagements were not considered as part of the GAR.

The methodology

The sustainability reports of 25 credit institutions in Europe were examined during the study including 14 credit institutions, federal state banks and asset managers in Germany. On December 31, 2022 all institutions disclosed their Environmental, Social and Governance risks (ESG risks) for the first time. From 2023, these reports are issued half-yearly.