Gaps Persist in Pillar III Disclosure Reports

PwC Study 2023: Disclosure of ESG risks frequently remains insufficient at European financial institutions – Risk assessments hampered by formatting errors and incomplete disclosures

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Christoph Schellhas - PwC

Christoph Schellhas
Partner, Financial Services Sustainability Lead at PwC Germany
Tel: +49 160 96941302

Supervisory authorities are paying closer attention to ESG Pillar III disclosures

At the beginning of 2022, the European Banking Authority (EBA) presented Implementing Technical Standards (ITS) for credit institutions for the disclosure of ESG risks pursuant to Article 449a CRR. The standard-setting bodies are keen to increase the quality and comparability of credit institutions’ disclosure reports in Europe.

These standards are intended to ensure that the financial sector makes an effective contribution towards climate protection and that the EU Green Deal is successfully implemented as a package of measures for a climate-neutral Europe by 2050.

“The transparent and detailed disclosure of ESG risks allows financial market players to make sound investment decisions and to better assess the institutions’ ESG performance.”

Christoph Schellhas,Partner FS Sustainability Lead at PwC Germany

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.

chart banking supervision

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.


Between transparency and sustainability: The ESG Pillar III Disclosure Study

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.

PwC solutions increase the transparency and comparability of disclosure reports

PwC Disclosure Box – PwC Synopsis

This solution contributes, along with various analyses, to improving the quality, completeness and consistency of the disclosure. Also safeguarding the availability of data for enhanced disclosure requirements also requires an efficient analysis and aggregation of the required information.

PwC Automated Reporting Tool (ART)

The application supports the automated and valid filling of Pillar III disclosure templates and the implementation of cross-checks in and between the supervisory reporting forms. The solution contains more than 10,000 regulatory validation rules and plausibility checks.

Automated Disclosure (AD – Support)

Like the ART solution, the tool enables the automated and valid completion of Pillar III disclosure templates and the implementation of cross-checks in and between the reporting forms.

“The disclosure obligations will be gradually extended in the coming years by adding new ESG criteria and requirements. “Credit institutions should move to comprehensively respond to these increased requirements, in order to be able to meet them in full and on time.”

Christoph Schellhas,Partner FS Sustainability Lead at PwC Germany

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Between transparency and sustainability: The ESG Pillar III Disclosure Study

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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.

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Christoph Schellhas

Christoph Schellhas

Partner, Financial Services Sustainability Lead, PwC Germany

Hana Musai

Hana Musai

Senior Manager, Risk & Regulatory, PwC Germany

Tel: +49 160 1519593­

Paula Aczel

Paula Aczel

Manager, Sustainable Finance, PwC Germany

Tel: +49 1515 7671900