ESG reporting: The challenges for lenders

Under the Corporate Sustainability Reporting Directive (CSRD), Environmental, Social and Governance (ESG) reporting will be obligatory from the financial year 2023 for large companies and 2026 for SMEs in the entire European Union.

With this directive companies will need to provide information related to:

• Environmental matters
• Social matters and treatment of employees
• Upholding human rights
• Anti-corruption and bribery
• Company board diversity, equity & inclusion (including age, gender, educational and professional background)

It is imperative that lenders recognise the data and methodological challenges that they face and start to broaden the scope of quantitative and qualitative reporting in relation to ESG risks, as they will have their own score to contend with, measuring the how ‘green’ their portfolio is. This will be expressed by two metrics: the Green Asset Ratio (GAR) and the Banking Book Taxonomy Alignment Ratio (BTAR) which will come into effect from June 2023.

Bankers argue that such figures and scores/ratings will be nigh impossible to calculate and involve a substantial amount of additional work. Another concern regarding the GAR is that it may strongly discourage banks from lending to hard-to-abate or transition sectors as they struggle to improve their scores.

A furthermore, banks will be required to account for and provide information on the portion of their banking books that align to the EU Taxonomy, including SMEs and other corporates that do not fall under the Non-Financial Reporting Directive (NFRD), such as those based outside the EU – this will inevitably be very challenging.