As sustainability becomes an integral part of the economic development in the EU, financial market participants are under pressure to disclose their commitment to a greener future.
Delegated Act 4987 under the EU Taxonomy Regulation defines Green Asset Ratio (GAR) as a key metric for credit institutions and investment firms to measure their commitment to sustainable finance and the transition to a low-carbon economy.
Although GAR is simply a proportion of assets associated with Taxonomy-aligned economic activities, actual GAR calculation and representation procedures are full of nuances.
Our automated solutions enable financial market participants to navigate the complexities of mandatory sustainability reporting with ease. While relying on GND expertise, credit institutions, and investment firms will obey sustainability reporting requirements and meet consumer expectations with the least administrative and operational expenses.
The banks (credit institutions) will be required to disclose two key alignment metrics. The first is known as the Green Asset Ratio (GAR) and captures loans made to large European companies based on the CAPEX and revenues associated with green activities. The second metric, the Banking Taxonomy Alignment Ratio (BTAR), is an assessment of the taxonomy alignment of the bank's broader balance sheet.
For investment firms dealing on own account GAR is the proportion of assets associated with Taxonomy-aligned economic activities within total assets. For investment firms dealing not dealing on own account (dealing on behalf of all their clients) GAR is a proportion of revenue from investment services and activities associated with Taxonomy-aligned economic activities within total revenue from investment services and activities.
Following the methodology set out by the Delegated Act 4987 under the EU Taxonomy, the numerator of GAR includes loans and advances, debt securities, and equity instruments, not High-frequency trading (HfT). The BTAR includes all those plus exposures to EU non-financial corporations and non-EU non-financial corporations (not subject to NFRD). The exposures to central governments, central banks, and supranational issuers need to be excluded from the calculation of the numerator and denominator of the GAR, as well as the assets held for trading.
Importantly, credit institutions have to disclose both the aggregate GAR for covered on-balance sheet assets and GAR breakdown by environmental objective and by type of counterparty.
As for the activities being Taxonomy-aligned, these are the ones that comply with ALL of the following (according to the Regulation (EU) 2020/852):
- make a substantial contribution to at least one of the six environmental objectives:
o Climate change mitigation
o Climate change adaptation
o Sustainable use and protection of water and marine resources
o Transition to a circular economy
o Pollution prevention and control
o Protection and restoration of biodiversity and ecosystems
- comply with the Do No Significant Harm (DNSH) principle to any of the other five objectives;
- comply with the Minimum Safeguards.
It's important to note that data on the EU Taxonomy alignment is the primary input for GAR computation. Therefore, the EU Taxonomy check of the economic activities associated with loans, advances/debt securities/equity instruments (for credit institutions), and assets (for investment firms) logically precedes sustainability reporting of the financial undertakings.
For more information on the Taxonomy-eligible and Taxonomy-aligned economic activities visit our EU Taxonomy alignment section here.
For all inquiries please reach our Client service team or contact one of our experts directly.
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