26 January 2024

EBF: Green Asset Ratio cannot be to sustainability what CET1 is to capital

The Green Asset Ratio (GAR) is in principle a simple ratio quantifying EU Taxonomy-aligned assets as a percentage of total covered assets. However due to its structure and constrained coverage it has a very limited information value.

• As major parts of the economy financed by banks are not tracked by GAR, the GAR cannot be considered a key metric to portray the financing of the green transition or an indicator of progress on meeting sustainability commitments.
• A simple comparison of GAR numbers between banks could also be misleading.  The structural features of the GAR, including exclusion of large part of the economy will  lead to divergence in the value of the green asset ratios, depending on a bank’s business model, client-base and geographical footprint.
• The higher a bank’s exposure is to SMEs and non-EU companies, the lower is the GAR that it will report. This is because, unlike the exposures to sovereigns, that are excluded from GAR  symmetrically, these exposures count towards the denominator but not the numerator of the GAR, lowering the GAR numbers. The same is true for activities that aren’t covered by the EU Taxonomy.
• The GAR comparison will be further hampered by the difficulties in assessing and documenting the EU Taxonomy alignment, in particular for retail clients and use of proceed financing. The clarification provided by the Commission in its 22 December 2023 FAQ results in in a very  restrictive interpretation in key instances. The late issuance of the FAQs is also not  allowing banks that are reporting early in 2024 sufficient time to adjust their approach.
• The overall expectations on the GAR and its information value have to be managed. The ratios of the different banks should not be compared without understanding the context and other relevant information on banks’ efforts to finance transition. In addition, GARs are expected to be low given the structural features of the GAR, the performance of the EU economy, as s well as the challenges for companies  and households to document alignment with the EU Taxonomy, even on activities that are generally considered “green”.
• Given the methodological limitations of the GAR and the practical usability issues, the planned revision of the GAR in 2024 is welcome and the EBF will be actively contributing to the discussion to improve both the GAR’s usefulness and usability. However, the GAR will always be limited to the EU Taxonomy alignment and will need to be complemented with other information to understand the progress of the financial sector.

 

EBF

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