Question
Should the EU Paris-aligned Benchmarks exclusion criteria be applied at consolidated group level and to that end, exclude the total gross carrying amount of the exposure towards the consolidated group level?
Background on the question
As specified in the instructions of Annex II of ITS on ESG Pillar 3, column b. corresponds to “the gross carrying amount of those exposures towards counterparties that are excluded from the EU Paris-aligned Benchmarks”. However, it does not specify at which level the exposure should be excluded: at entity level or at the group consolidated level? Example 1: We finance subsidiary ALPHA whose activity is not excluded from PAB. However, the consolidated group is excluded from PAB. Should the exposure towards subsidiary ALPHA be reported as excluded from PAB? Example 2: The bank has an exposure of 100M towards XYZ consolidated group. Only Z subsidiary, on which we have a 20M exposure, is excluded from PAB. Should the bank exclude the whole exposure towards XYZ group (100M) or only the exposure towards Z subsidiary (20M)?
Answer
In column b of Template 1 in Annex XXXIX of Regulation (EU) 2021/637, following the instructions provided for Template 1 in Annex XL of the same Regulation, institutions should disclose the gross carrying amount of those exposures to the direct counterparties or specific obligor that are excluded from the PAB, i.e., at entity level. If the direct counterparty or obligor is not an institutional unit (independent legal entity), then the disclosure should be done at consolidated group level. In Example 1, if the counterparty is a subsidiary which is an institutional unit (i.e., an economic entity characterised by decision-making autonomy in the exercise of its principal function), the exclusion criteria is applied at entity level. Since the subsidiary is not excluded from PAB, then the exposure towards to this subsidiary is not excluded from PAB. If the subsidiary is not an institutional unit and cannot act independently of its parent, is treated as part of the parent and the exposure is excluded from PAB. In Example 2, similar to Example 1, the exclusion is considered at entity level and the exposure towards subsidiary Z is considered excluded from PAB.