The Green Asset Ratio calculation? The EU Taxonomy is the problem (and the solution).

From 2024, around 150 lenders will be required to disclose their Green Asset Ratio (GAR). This new KPI is meant to reflect the percentage of sustainable assets in the lender’s banking book.

Because we are writing about it, you might already suspect that the GAR has something to do with the EU Taxonomy – and you would be right in doing so!

“Environmentally sustainable” assets (i.e., the GAR’s numerator) will have to be assessed against the Taxonomy’s Technical Screening Criteria. The asset base covered by the GAR (i.e, the ratio’s denominator) is instead determined based on Taxonomy-eligible activities. Eligible activities are simply the ones listed in the Taxonomy. Activities that follow all relevant criteria, making a substantial contribution to one of the EU’s environmental objectives, are designated as Taxonomy-aligned.

Unfortunately, for most lenders, a large part of their assets is out of the scope of the ratio. Although the Taxonomy covers activities responsible for over 90% of the EU’s real-economy carbon emissions, assets held for trading exposures to governments and central banks are not Taxonomy-eligible. Consequently, they are excluded from the GAR denominator altogether.

In addition, financing for eligible SMEs or non-EU corporates cannot officially qualify as Taxonomy-aligned even if they were to be, which, again, makes it so that the GAR doesn’t fully reflect a lender’s real proportion of sustainable investments.

The bottom line: depending on the lender’s business model and its geographical focus, two ratios might differ more than the two banks’ actual “greeness”. For example, if a large bank has huge exposure to sovereign debt, it could be that only half of its total assets are covered by the GAR denominator. Conversely, in the case of a financial services provider that specializes in retail lending for real estate/mortgages, up to the entirety of their assets could be covered.

Before determining whether a balance sheet is greener than another, one should think of whether the two are actually comparable, based on how much of total assets are covered by the GAR.

These limitations will likely lighten in the future. However, it's still important to keep in mind two further elements:

• The scope of Taxonomy-eligible activities will increase with the addition of four environmental objectives. Many more asset classes/sectors like agriculture and aquaculture will be factored into the GAR’s denominator.
• The EBA proposed the BTAR framework (Banking Book Taxonomy Alignment Ratio). This would extend the GAR numerator to include counterparties not covered by the NFRD. The BTAR could give a more complete picture of lenders’ Taxonomy alignment, while incentivizing the provision of capital to SMEs. However, significant data availability challenges remain. This might lead to the use of proxies for the BTAR calculation.
• The upcoming CSRD will extend the scope of companies that can be Taxonomy-eligible and aligned. This will also extend the GAR coverage of most lenders’ assets.

If you are a green lender, it's easy to get lost in this regulatory jungle. Digital solutions can augment your GAR denominator by scraping and mapping all your assets for eligibility in an automatic, efficient and results-oriented way.

This can boost the share of your assets covered by the GAR, while assisted alignment assessment can help you optimize the proportion of environmentally sustainable ones.

Still unsure about the path forward? At Briink, we have the knowledge and expertise to put you on the right track when it comes to your Taxonomy assessment. Get started today by asking for a free consultation.