ESG data need of the financial sector

Tom Van den Berghe – Febelfin – tom.van.den.berghe@febelfin.be

Agenda

1 Legal framework

2 ESG data needs

3 Impact

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 Legal
1 framework

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EU Sustainable Finance initiatives
— Taxonomy regulation
— Sustainable Finance Disclosure regulation
— Climate Benchmark regulation
— MiFID amending delegated acts
— Corporate Sustainability Reporting Directive
— CRR Pillar 3 disclosures on ESG risks
— EBA guidelines on loan origination and monitoring
— ECB guide on climate-related and
environmental risk
— EU Green Bonds Standard
— EU Ecolabel
— …
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Impact of (EU) Sustainable Finance initiatives
Reorienting capital to sustainable
economic activities
Taxonomy
EU Green Bonds Standard
EU Climate Benchmarks
Ecolabel & National labels
MiFID
Disclosure of sustainability of
business
Sustainable Finance Disclosures
Non-Financial Reporting/Corporate
Sustainability Reporting
Management of sustainability risks
CRR Pillar 3 disclosures
ECB guide on climate-related risk
EBA guidelines on loan origination and
monitoring
NBB circular letter about energy
performance of real estate exposures
of financial institutions

Improved financing solutions for Transparency about positive & Riskiness of unsustainable activities
sustainable projects & businesses negative sustainability impact & businesses

Attractiveness & opportunities for financing of specific activities

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 2 ESG data needs

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ESG disclosure obligations in the EU relevant
for financial institutions

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Information flow
— Financial institutions are providers and users of ESG data
— To be able to respond to own reporting requirements, FIs rely & depend on ESG reporting by
the companies they finance
— Sometimes similar, duplicate or overlapping data but not always

ESG reporting by Financial Institutions ESG reporting by Companies

• Taxonomy-alignment of balance sheet • Taxonomy-alignment of activities

(Green Asset Ratio) (Turnover, CapEx, Opex)
• Management of Principal Adverse Impacts • Principal Adverse Impact data and policies
in investment process (SFDR) • Climate-related KPIs (carbon intensity)
• Climate-related and environmental risk • Energy efficiency of (residential and
assessment & stress testing commercial) buildings
• ESG factors on the financial conditions of
borrowers, affecting the collateral value
• Quantitative and qualitative disclosures of
prudential information on ESG risks

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Detail: EU Taxonomy
— Corporate Taxonomy-alignment  Investment portfolio Taxonomy-alignment

— Similar for Taxonomy-alignment of loan portfolio

— Green Asset Ratio (art. 8)
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Detail: EU Sustainable Finance Disclosure
regulation (SFDR)?
— Asset managers are required to disclose how the integrate ESG in their
investment policies
— Double materiality:
Sustainability risk management (climate, legal,
reputational)
 Protect financial value
Manage principal adverse impact on sustainability
factors (= Avoid harm to society, people, planet)
 Protect societal value
— ESG data needed from companies in investment portfolios
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Some environmental SFDR indicators
a) Climate change c) Water
 Greenhouse gas emissions, carbon intensity  Tonnes of emissions to water generated by
 Energy use, energy efficiency investee companies per million EUR invested
 Water use & recycling
b) Biodiversity
 Share of investments in investee companies the
 Investments in investee companies with activities of which cause land degradation,
sites/operations located in or near to desertification or soil sealing
biodiversity-sensitive areas where activities of
those investee companies negatively affect those  Share of investments in investee companies
areas without sustainable land/agriculture practices or
policies
 Investments in investee companies without a
biodiversity protection policy covering
operational sites owned, leased, managed in, or
adjacent to, a protected area or an area of high
biodiversity value outside protected areas  …
 Investments in investee companies whose
operations affect threatened species
 Investments in companies without a policy to
address deforestation
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Some social SFDR indicators
 Share of investments in investee companies without any supplier code of conduct (against
unsafe working conditions, precarious work, child labour and forced labour)
 Share of investments in entities without a due diligence process to identify, prevent,
mitigate and address adverse human rights impacts
 Share of investments in investee companies exposed to operations and suppliers at
significant risk of incidents of child labour exposed to hazardous work in terms of
geographic areas or type of operation
 Share of the investments in investee companies exposed to operations and suppliers at
significant risk of incidents of forced or compulsory labour in terms in terms of geographic
areas and/or the type of operation
 …

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Detail: Prudential impact of sustainability
risks
— Circular Letter of the Belgian National Bank (December 2020) on gathering and
reporting on information related to the energy performance of real estate
exposures of financial institutions.
— The goal is to ask financial institutions to start analysing the transition risk
related to their real estate exposures
— Financial institutions are asked
 To gather information on energy performance of real estate exposures
 To report to NBB information on energy performance of new residential mortgage loans
as of 2021
— Info on residential mortgage loans through consultation of regional EPC
databases or customers.
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Challenges
Data Data
Availability Sources
Data Data
Format Data Requests
Data Quality
Access

— Timing & scope difference between FI & Corporate disclosure requirements

— European centralized electronic register for environmental, social and
governance data
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SMEs

— Very large part of BE banks clientele

— Little publicly available data on SMES to determine whether they meet the
taxonomy criteria
— No CSR reporting
— Assessing the alignment of SME business activities against the EU Taxonomy
often relies on manual and individual intervention that is inefficient and costly,
both for SMEs and banks
Importance of appropriate & proportional ESG data reporting

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 3 Impact
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Impact of (EU) Sustainable Finance initiatives
Reorienting capital to sustainable
economic activities
Taxonomy
EU Green Bonds Standard
EU Climate Benchmarks
Ecolabel & National labels
MiFID
Disclosure of sustainability of
business
Sustainable Finance Disclosures
Non-Financial Reporting/Corporate
Sustainability Reporting
Management of sustainability risks
CRR Pillar 3 disclosures
ECB guide on climate-related risk
EBA guidelines on loan origination and
monitoring
NBB circular letter about energy
performance of real estate exposures
of financial institutions

Improved financing solutions for Transparency about positive & Riskiness of unsustainable activities
sustainable projects & businesses negative sustainability impact & businesses

Attractiveness & opportunities for financing of specific activities

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Impact on companies

— Financial institutions need ESG information from companies to fulfil their own
disclosure & prudential requirements

— Companies will increasingly be asked by financial institutions to report on

 ESG policies
 How harm to environmental and social issue is avoided, also in the supply chain
 Taxonomy-alignment of their activities
 Where they make a substantial contribution to environmental objectives

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Impact on corporate financing
— Objective of EU regulations is positive: mobilise and reorient more capital towards green
economy
 Voluntary use: become more attractive for financing
 Basis for engagement on ESG between financial institution and company
 Side-effect:
 More unaligned companies might become less attractive for financing (esp. when ‘brown’ taxonomy
would be created)
— Taxonomy-alignment as building block for new green financing solutions
 EU Green Bonds Standard
 EU Ecolabel and national ESG labels (BE Towards Sustainability)
— Banks may voluntary use Taxonomy in lending activities
— BUT: Taxonomy-alignment only 1 element in of credit/investment decision
Importance of ESG reporting by companies will keep increasing

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 QA
&

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Belgian Financial Sector Federation
www.febelfin.be