EU taxonomy is poor measure of bank sustainability efforts, says lobby group

The EU’s metric to measure the proportion of green assets on a bank’s balance sheet will fail to accurately portray efforts to make the economy sustainable, a German bank lobby group has said.

The Green Asset Ratio (Gar) will go into effect next year, with European banks being required to show how much of their assets are aligned with the EU’s taxonomy.

It is part of the EU’s push to get banks to disclose more information on climate change risks, including losses due to extreme weather events and loans lost due to companies going out of business as a result of the net-zero transition. In theory, it should allow investors and regulators determine how green a bank’s balance sheet is.

But the Association of German Banks says the ratio is a limited view of banks sustainability efforts and the ratio will be in the single low digits. The group reviewed 450 European companies and found that only a fraction of the economy meets the EU taxonomy for sustainability.

About 70% of the economy can’t be considered sustainable under the rules, while bank balance sheets reflect the whole economy. Because of this, policies should not be made based on the green asset ratio and instead should be expanded to include project finance, the group said.

The transition to a green economy is a process rather than a state, and a principle-guided framework is needed, said Heiner Herkenhoff, chief executive of the banking association.

The lobby group is not the only one to criticise Gar. Critics have wondered how useful the metric is and if it will actually help drive change, as its scope is limited and there is a general lack of available data. A 2021 study from the European Banking Authority estimated an average Gar of 7.9% in a sample of 29 European banks.

NGOs have also critised the EU taxonomy, calling it a greenwashing tactic with weak and unscientific criteria.

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