Green disclosures likely to shift banks’ lending and investing: Fitch

New environmental disclosure requirements would likely push banks to prioritize funding for “greener” assets, said Fitch Ratings in a new report.

The rating agency said the European Banking Authority has proposed that banks be required to disclose “green asset ratios” (GARs) as of the end of 2022.

When the new disclosure requirements take effect, “banks will be forced to reassess the costs and benefits of financing certain businesses, especially those with high greenhouse gas emissions,” Fitch said.

This could, in turn, lead to shifts in bank lending from dirtier assets to greener ones, it said.

Additionally, the report said, “Banks with lower ratios may be shunned by investors, leading to funding pressure.”

Fitch said it views proposed GAR disclosures as “a good first step towards comparable environmental disclosure on loans and investments across banks, but there will be gaps in their usefulness given data limitations, exclusions and a staggered approach to implementation.”

Among other things, the ratings agency noted that the planned disclosures do not yet “cover all environmental objectives or industry sectors,” and that sovereigns and most public-sector exposures are not yet included.

“We estimate that the ratios will cover, at best, 75%-80% of banking book exposures, with about 30% subject to estimates and proxies,” said the report.

Additionally, collecting data on certain exposures by 2022, such as smaller companies, may prove to be a challenge, Fitch said.

The credit rating implications of these new disclosures and their impact on bank operations “are only likely to be felt over the long term,” the agency noted.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.