The European Central Bank (ECB) has published new statistical indicators to improve the reporting of climate-related risks in the financial sector. It expects will incorporate features of other ESG-related reporting standards, although its efforts may be negatively impacted by the delays in their implementation.
- The ECB has come up with a new set of indicators to help the financial sector measure and analyse climate-related risks.
- As the financial sector plays a key role in enabling the transition to net zero, high-quality data and indicators are essential to help manage monetary policy and enhance transparency.
- While the new indicators are ‘a work in progress’ and will incorporate developments in reporting standards, the ECB’s efforts may be hampered by the delays and complexities in implementing these standards.
In announcing updates to its climate action plan in July 2022, the ECB identified the need to reduce its balance sheet risk from climate change, and to promote transparency in supporting the green transition of the EU economy. By October 2022, it had recognised the need for improved data and disclosure, and began to tilt its corporate bond holdings towards issuers with superior climate reporting.
Only assets on banks’ balance sheets that comply with the EU’s Corporate Sustainability Reporting Directive (CSRD) can be accepted throughout the Eurosystem, which comprises the ECB and all the central banks of the countries that have accepted the euro as their currency.
Although the implementation of the CSRD has been delayed until 2026, the ECB wants stakeholders to improve disclosures and improve data quality to align with the new standard as early as possible.
The ECB also sees an increase in transparency and quality of ESG data reporting by financial and non-financial entities resulting from the implementation of the Sustainable Finance Disclosure Regulation (SFDR) and EU Taxonomy Regulation, which it believes can help enhance the climate change-related data needed to reduce its balance sheet risk.
What are the new statistical indicators being proposed by the EU?
With a view to helping the transition to net zero, the ECB has published a set of statistical indicators, intended to improve the assessment of climate-related risks faced by the financial system. They form part of the Eurosystem’s efforts to build and support improved, harmonised disclosures of climate-related data and, to achieve this, it is engaging with other European national and global standards-setting activities.
The hope is that this will help improve the granularity of corporate-level climate data, which has also been externally validated, enhancing the assessment of transition and physical risk faced by financial institutions and their counterparties. The new proposed measures are to be reviewed regularly to ensure they are aligned with the objectives of the Paris Agreement and fulfil the EU’s climate neutrality objectives.
“We need a better understanding of how climate change will affect the financial sector, and vice versa. For this, the development of high-quality data is key,” said executive board member Isabel Schnabel. “The indicators are a first step to help narrow the climate data gap, which is crucial to make further progress towards a climate-neutral economy.”
How do the new statistical indicators advance climate-risk data gathering?
According to the ECB, using data currently available from the European System of Central Banks (ECSB) or other publicly available data ensures that the stakeholders can access and replicate existing data across the Eurosystem.
The indicators can either be experimental, or analytical. Experimental data is defined by the ECB as “economic and financial data, collected and compiled by the ECB, whose quality is somewhat lower than that of other ECB statistics”.
Analytical indicators are “data that are at a research or work-in-progress stage and have not yet reached the quality of experimental statistics but are already considered relevant if used with care and accompanied by suitable explanation and caveats”.
Initially, the central bank will focus on three areas of finance that are impacted by climate risk: sustainable finance, financed and facilitated emissions by financial institutions, and climate-related physical risks.
Indicators relating to sustainable finance address an important gap in the market, namely that of a lack of internationally accepted and harmonised standards on what defines a green or sustainable bond. They are also intended to improve the transparency on financed and facilitated emissions by financial institutions. A larger amount of emissions results from bank financing of company operations than is accounted for by the portfolios of shares or bonds held in investment funds, the data indicates.
On physical risks, the ECB sees the need for improved data on flooding as an imperative to reduce climate-related risks.
The new indicators are viewed as ‘a work in progress’
As the new indicators are either experimental or analytical, they are deemed a work in progress, as “experimental data comply with many, but not all, of the quality requirements of official ECB statistics”, and “analytical data have a lower quality and certain – sometimes significant – limitations”.
The intention of the ECB is to initiate a dialogue with stakeholders on improving climate risk data quality and transparency to accelerate the transition. Further improvement in the indicators is expected from the availability of improved disclosures and sources, in turn resulting from standards and disclosure requirements such as CSRD, SFDR and the EU Taxonomy.
Indicators may run the risk of adding complexities from other standards
The ECB’s efforts at developing climate-risk indicators for the Eurosystem in conjunction with CSRD, SFDR and the EU Taxonomy could be negatively impacted. Each of these three standards has been faced with delays and complexities in implementation.
While the CSRD has been finalised, the European Sustainability Reporting Standards (ESRS) remain under development, with the first set of standards expected to come into legislation in June 2023, while a second set relating to small businesses is expected in June 2024. Originally, these deadlines were set for October 2022 and October 2023, respectively.
Complexities associated with the EU’s SFDR have resulted in delays in its implementation by six months, and have also been accompanied by downgrades of sustainable investment funds from Article 9 to Article 8. Some of these complexities relate to the alignment of SFDR reporting requirements with the EU Taxonomy. Amendments to the Taxonomy to include nuclear and gas as sustainable fuel investments have been criticised by climate activists as an official validation of greenwash.
These amendments call into question the definition of sustainable investment, which only serves to further muddy the waters when it comes to SFDR. While the EU leads global efforts on implementing climate risk reporting standards and legislation, the complexity of its myriad regulations could delay the bloc from achieving the goals of its sustainable agenda.
