EU central banks need data. The omnibus won’t make it easy

Brussels wants to simplify climate reporting requirements for companies. But EU banking regulations require financial institutions to understand and report on their climate risk.

The result is a disconnect between the data needed by regulators and banks, and the European Commission’s drive to make the bloc more competitive by removing what it says is unnecessary red tape.

In a legal opinion from May, the European Central Bank (ECB) cautioned the EU from drastically reducing the scope of the corporate sustainability reporting (CSRD) and due diligence directives (CSDDD), as it would increase the data gap for the economy, investors, and wider sustainable goals.

An analysis by Green Central Banking found that 63% of EU national bank regulators do not intend to require any additional reporting or regulations other than what is required under the updated omnibus package, despite several supervisors pointing out that the revised rules could cause a lack of data. Of the 27 regulators, 22% did not respond to a request for comment.

Only four EU central banks replied that they were taking action to address the data disconnect.

Response of EU nation-state central banks

Banque de France (BdF), which has consistently earned the highest rating in the Green Central Banking Scorecard, is creating a climate indicator to help businesses understand and manage their climate risk.

The aim is to complement France’s planning strategy and support companies’ transition to a low-carbon economy, a BdF spokesperson said. The climate indicator is voluntary for companies that are not subject to the CSRD and based on existing frameworks to avoid reporting burdens, they added.

In the Netherlands, climate action plans submitted by financial institutions – like those part of the industry-wide Dutch climate commitment – are relevant to the central bank as a prudential supervisor, a spokesperson from De Nederlandsche Bank (DNB) said.

Not only do they help financial institutions manage climate-related risks and adjust their business models, but they are also a further source of information for the DNB. It also reflects growing concern about the impact of investments and assets on the environment and could represent an increase in reputational and legal risks, they said.

These risks are reason enough for the DNB to incorporate voluntary climate commitments like climate action plans into its supervision, they added.

Banco de Portugal said it supports EU efforts to reduce complexity but that the growing financial impact of environmental risks means supervised institutions are still required to gather necessary data and it welcomed voluntary standards in the absence of other disclosure requirements.

“Its broad use by entities not subject to sustainability reporting requirements promote the disclosure and collection of information in a structured and harmonised form, despite drawbacks linked to reduced scope and self-selection bias which may affect the quantum and quality of available ESG data to stakeholders,” a spokesperson said.

In Denmark, the Danmarks Nationalbank also acknowledged the need to reduce the data points and welcomed the simplification focus on climate-related disclosures under the ESRS.

“It remains important that authorities and the financial sector have access to sufficiently standardised data from relevant companies to assess climate-related financial risks. We therefore continue our ongoing dialogue with the financial sector and European partners regarding data and risk issues,” said Martin Oksbjerg, climate task force lead at Danmarks Nationalbank.

Meanwhile, departments within Belgium’s national bank have expressed interest in sustainability data, but there is limited value in encouraging voluntary reporting since the digitalisation of sustainability reporting which needs to be approved by the European Commission, a press spokesperson said.

Questions around data still remain

The sustainability omnibus package passed in December not only limits the scope and data points of companies required to report, but also puts a ceiling on what information companies can request from smaller firms in their supply chain. LINK While the limit, called the value chain cap, is supposed to only apply to requests made in order to report under the CSRD, some say the final text still leaves room for uncertainty.

The issue is that the information requested often has multiple uses, said Pierre Garrault, senior policy advisor at Eurosif.

“Information requested for sustainability reporting can also inform risk and due diligence assessments, or engagement with investee companies – and vice versa. Distinguishing between the different uses of information is operationally difficult,” he said.

The result for banks means that while they are required to report emissions and climate risk under Pillar 3, the EU is adding a potential complication by trying to regulate bank-client relationships.

Trying to regulate those relationships through legislation that is, at its core, about financial market disclosure is “clumsy” and “a huge misunderstanding”, said Agnieskzka Smolenska, senior policy fellow and head of prudential policy at Centre for Economic Transition Expertise.

“In the best case it’s ignorance, and [in] the worst case it’s really bad faith, and just reveals how much lobbying there is now in Brussels from presumably highly emitting companies who are starting to get questions about their environmental performance and impact, and are looking for a way to essentially get safe harbour provisions to continue to act in a way that is not only environmentally harmful, but also ultimately costly to the taxpayer,” she said.

The CSRD is about disclosure of corporations, both financial and non-financial, in order to help facilitate market discipline and provide information for investors. It is not to regulate the prudential and financial stability of the financial sector, which is the context in which banks ask questions of their clients, explained Smolenska.

“It would essentially be creating a gigantic blind spot in the risk management of financial institutions in Europe, with regards to a huge source of an emerging risk,” said Smolenska.

“MEPs seem to think that banks are asking for this information in order to fill out their CSRD disclosures, which is not the case,” she said. While there is some overlap between what banks are required to report under CSRD and Pillar 3, banks need to ask for information from their clients in the context of risk management, as well as product and service innovation related to green finance products.

Under Pillar 3 rules, a proposed voluntary climate-related disclosure framework includes recommendations to disclose scope 1, 2 and 3 emissions, which would cover banks’ direct and indirect greenhouse gases. Although not legally enforceable, Basel rules are looked on as best practice.

Meanwhile, European banks will also need to publish their prudential transition plans under the capital requirement directive that goes into effect in January. Under the rules, banks’ transition plans need to be consistent with their voluntary plans and commitments.

Tsvetelina Kuzmanova, senior project manager at Cambridge Institute for Sustainability Leadership, said she was worried from the beginning that there would be a slow rollback of obligations for the financial sector.

“It is quite interesting and shocking that this very intricately interconnected system is just revised in one single corner, and the implications for the rest of the supervisory framework are [not questioned],” she said.