Key points

The introduction of the Green Asset Ratio (GAR) through Article 8 of the EU Taxonomy Regulation poses operational challenges for EU banks, and also gives them a number of strategic questions to consider. The simplicity of the metric belies the overall data intensity of doing the GAR calculation; the challenges of categorising exposures in order to calculate it; the challenges to interpreting it; the risks inherent in misreporting it; and its potential importance for how banks run their businesses over the next decade and beyond as they respond to the climate emergency. Specifically:

  • Given data limitations and the limitations on the scope of the GAR calculation, banks will need to consider carefully how they frame their GAR disclosures i.e. how they help investors and the general public understand the full picture of their “greenness” – especially in light of any assumptions that they have made due to incomplete data.
  • The GAR potentially has implications for both balance sheet and product strategy, particularly if it becomes material to banks’ cost of funding and credit ratings. It may also become an important metric for balance sheet optimisation.
  • The GAR adds to an ever-growing list of initiatives which require banks to gather climate-related counterparty and customer data. Banks should consider the data requirements for the GAR in the wider strategic setting of all sustainability-related requirements, such as TCFD disclosures, and avoid addressing these requirements in silos. Instead, banks should aim to have a holistic view of the data that they are collecting.

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The GAR measures a bank’s “green assets” as a share of its total assets, with the categorisation of both eligible and aligned green assets defined by the EU’s taxonomy for sustainable activities. Banks subject to disclosures under the Non-financial Reporting Directive (NFRD) – i.e. those with more than 500 employees –  will need to start disclosing their ratio of Taxonomy-eligible assets (i.e. activities covered by the Taxonomy Regulation) from 1 January 2022, and disclosing their ratio of Taxonomy-aligned assets (i.e. activities that significantly contribute to an EU-nominated climate or other environmental objective, meet strict technical screening criteria, while also doing no significant harm and meeting minimum safeguards) from 1 January 2024. Mapping exposures to eligibility and alignment criteria will be where banks need to focus significant efforts. Most large EU banks will also be required by the EBA to publish the GAR as part of wider Pillar 3 disclosures on ESG risks from January 2023, inviting further financial scrutiny.

In principle the GAR is a simple ratio of Taxonomy-eligible or Taxonomy-aligned assets as a percentage of total assets. The objective of regulators is to provide an easy-to-understand key performance indicator (KPI) that stakeholders - including customers, investors, and supervisors - can then use readily to assess,  measure and compare the Taxonomy alignment of banks’ portfolios as at a point in time.

However, the simplicity of the metric belies the difficulty of categorising exposures in order to calculate it (in particular, whilst data are limited and the taxonomy is still evolving); the potential challenges to interpreting it; the risks inherent in misreporting it; and its potential importance for how banks run their businesses.

Nevertheless, because of the metric’s simplicity it could become a touchstone for assessing banks’ transition to more sustainable businesses models. Limiting the quantity of carbon emissions to “net zero” and temperature change to less than two degrees Celsius have already become shorthand for a multitude of sustainability-linked initiatives and endeavours by companies and the public sector. The GAR could similarly become a galvanising measure, in particular in terms of the extent to which banks – and by extension the economy – are becoming more sustainable.

For these reasons, the introduction of the GAR could have a number of strategic implications for every EU bank. An early consideration of these points will better position banks to factor them into existing lending and trading book practices.

Managing the message

Initially, banks’ GARs are likely to be low. The EBA, in a report published in May 2021, estimated an average GAR of 7.9% for a sample of 29 EU banks. There are several factors that lie outside the control of banks that will contribute to pushing down ratios in the short term. For example, current limitations in the scope of the EU Taxonomy (certain sectors, environmental objectives, and transition finance are not yet included in the scope of the Taxonomy); and the structure and coverage of the GAR itself (derivatives exposures, exposures to small or non-EU corporate counterparties that do not disclose under the NFRD, and sectors not yet covered by the Taxonomy are excluded from the numerator but not the denominator).

Another consideration is that limited data availability and the difficulty of mapping exposures to the Taxonomy, especially in the early years, will impair banks’ ability to assess the Taxonomy alignment of their exposures and necessitate judgement calls. This may in turn add to variability between different banks’ disclosures, making peer comparison more difficult. Banks will also need to be alert to the “greenwashing” and liability risks that could arise if their disclosed GAR subsequently proves to be inaccurate, even if the cause is poor quality external data.

Banks should consider whether it will be necessary to publish supporting information alongside the GAR in order to provide sufficient context for stakeholders and help to support comparability of disclosures. This could be particularly important if the business model or geographical footprint of the bank is likely to drive divergence between the bank’s GAR and the ratios of banks that would otherwise be considered peers.

A starting point could be to explain how the ratio’s structural features described above affect the value of the ratio – i.e. describing how certain key business lines, counterparties and asset classes are not (or not yet) included in the GAR. Banks could also reconcile their net zero transition plans to the ratio - and how they expect to improve their GAR as they execute their net zero strategy. Although there is no formal link between the GAR and net zero plans, both capture information on the greenness of the business and may be linked – or conflated – by stakeholders. Inconsistency between the two could undermine messaging around a bank’s transition to sustainability.

The main indicator that banks will be required to publish is the GAR based on their stock of existing loans. Alongside that, banks will be required to report the GAR for their “flow” of new loans. “Flow” GARs are likely to improve at a faster rate than “stock” GARs – as part of any additional disclosures, banks could highlight this as evidence that they are engaging with stakeholders and taking action to improve the sustainability of their overall portfolio.

Banks should also be transparent, particularly in the early years, around their progress on collecting the relevant data for the GAR, and any assumptions made and limitations that they have come up against, e.g. on data quality. After the first disclosure, banks should describe the main drivers in changes to their GAR, and the extent to which the changing scope of the Taxonomy and availability of data are relevant factors.

Providing this additional context will help investors and the general public to understand that, given its limitations, the GAR only provides one (and a potentially narrow) view of the bank’s greenness, and needs to be read in the context of other climate and ESG disclosures made by the bank. The data required for this will need to be factored into existing project implementation plans in order to ensure the data are available to the same timeline.

The implications for banks’ balance sheet and product strategy

In general, the climate risks on banks’ balance sheets and the effectiveness of their transition plans will affect stakeholders’ assessments of the banks’ business strategy and financial resilience, potentially affecting their share price or credit rating, and in turn access to and cost of capital and funding. As a summary measure of greenness, the GAR could in turn be adopted as a key determinant in the assessments by equity and debt investors. Investors may rely on banks’ GARs to identify green finance leaders and laggards, and a low outlier could serve as a red flag against a bank’s ESG characteristics.

If GARs influence capital and funding costs, then banks will want to consider how the GAR is integrated into financial planning, and how business decisions will affect the GAR – in the same way as banks are already accustomed to considering other regulatory metrics, such as capital, leverage and liquidity ratios. Bank senior management would then set GAR targets (which could become constraining metrics in balance sheet optimisation exercises) and develop a forward view of GAR, understanding how their balance sheet needs to evolve in order to meet the targets set.

Balance sheet optimisation decisions will be affected by the (planned) evolution of the Taxonomy (and, as a result, the exposures that are eligible for inclusion in the numerator of the GAR). For example, some non-Taxonomy-aligned exposures may eventually become Taxonomy-aligned (i.e. as more activities come in scope of the Taxonomy regulation and technical screening criteria are developed for the remaining environmental objectives).

As a component of this analysis, banks need to think about product strategy. There are still uncertainties around how the market for green products will develop. However, to make tangible progress towards the climate transition and to meet targets such as net zero, and to serve increasing customer demand, it seems likely that green products will become more prominent. In any case, EU banks must incorporate ESG factors in all parts of the loan origination process, including pricing, to comply with the EBA Guidelines on Loan Origination and Monitoring. The implementation of the GAR creates an additional incentive for banks to increase their lending to Taxonomy-aligned activities. For example, bonds that qualify under the EU Green Bonds Regulation,  will have a positive impact on banks’ GAR, as they will be eligible for inclusion in the numerator of the GAR equation. Banks will need to consider how markets for green products, particularly those which will be “GAR positive” are likely to evolve, and the implications for their pricing strategy of changes in supply and demand for Taxonomy-linked green products.

The need for a single view of climate-related data

Calculation of the GAR will likely require banks to gather data from their counterparties and customers, for example, to inform the mapping of exposures to the Taxonomy. In parallel, banks have (or will soon need to have) projects in train to: integrate climate risk into their risk management frameworks and develop their stress testing capabilities; extend disclosures including the EBA’s new Pillar 3 requirements for ESG risk, product-level disclosures under the EU Sustainable Finance Disclosure Regulation and TCFD Disclosures guidelines; and to develop management information on climate risk exposures.

Banks will therefore be gathering climate-related data for a variety of purposes across their Risk, Finance and Reporting functions, and possibly other parts of the organisation. A key challenge for banks is how they classify their counterparties consistently across different business areas or legal entities (against the NACE code classification system*, and the EU taxonomy more generally). The most efficient solution would be for banks to form an aggregated view of the data that are needed, and to develop a data strategy for ensuring the coherence of disclosures across different reporting initiatives.

In practice, this would likely lead to banks striving to gather the relevant climate data at a single point in the customer journey, and then ensure that they are able to use the data for as many purposes as possible. The data need to be collected in a format, and using a data infrastructure, that can be accessed for different purposes across the bank and viewed through different lenses.


All of the above demonstrates that the implementation of the GAR will pose significant strategic challenges for EU banks, on top of the operational challenges in collecting the data to determine the Taxonomy-alignment of their exposures. That said, banks should treat the implementation of the GAR as an opportunity – to develop an efficient and coherent climate data model, to optimise their balance sheet and product strategy, and to reinforce the credibility of their publicly stated net zero plans.

*NACE code refers to the Nomenclature statistique des activités économiques dans la Communauté européenne, which is the statistical classification system of economic activities in the European Union. A full list of NACE code activities can be found here.