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Green Asset Ratio cannot be to sustainability what CET1 is to capital

Il Green Asset Ratio non può rappresentare per la sostenibilità ciò che il CET1 rappresenta per il capitale

The primary objective of the Green Asset Ratio (GAR), established under the Article 8 Delegated Act of the EU Taxonomy Regulation (2020/852)2 was to help stakeholders understand financial undertakings’ contribution to European environmental and climate objectives.

While the Green Asset Ratio is a step towards improving transparency, it will not be able to tell the whole story of the transition efforts of banks. As also recognized by the European Banking Authority (EBA) in its recent report on green loans and mortgages3, at the current juncture, technical screening criteria of the EU Taxonomy are strict and exclude a large volume of activities contributing to the transition of the economy.

The GAR will only show a small portion of banks’ efforts to finance the transition. Due to its coverage, its design, the challenges to document compliance and the limitation in its usability, the GAR cannot and should not be considered an indicator of progress on meeting institutions’ sustainability commitments.
For example, a bank can be making significant progress in helping clients in high emitting sectors to reduce their environmental impact, but this will, in most cases, not be reflected in the GAR. Similarly, the financing of a renovation loan for a building with low energy efficiency will not be reflected in the GAR unless a high energy efficiency level is achieved after the renovation and all DNSH (Do No Significant Harm) criteria of the EU Taxonomy are met. Financing of governments, regardless of their “greenness” will also not lead to a higher GAR as sovereign exposures are excluded from the GAR calculation.

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