EU Taxonomy for Financial Institutions
Financial institutions face unique EU Taxonomy challenges — their core activities (lending, investing, underwriting) are not listed in the Taxonomy as eligible activities. Instead, banks disclose the Green Asset Ratio (GAR) and asset managers disclose portfolio taxonomy alignment. Here is how it works.
Financial institutions face unique EU Taxonomy challenges — their core activities (lending, investing, underwriting) are not listed in the Taxonomy as eligible activities. The Green Asset Ratio (GAR) measures the proportion of a bank's total assets that finance taxonomy-aligned economic activities.
The Green Asset Ratio for banks
The Green Asset Ratio (GAR) measures the proportion of a bank's total assets that finance taxonomy-aligned economic activities. It was introduced by the EU Banking Authority (EBA) as the primary taxonomy KPI for credit institutions.
GAR numerator: Loans, advances, debt securities, and equity exposures to non-financial corporates that are taxonomy-aligned — based on the counterparty's disclosed taxonomy alignment (Revenue, CapEx, OpEx KPIs). Plus direct holdings of taxonomy-aligned green bonds.
GAR denominator: Total on-balance-sheet assets, with certain exclusions (sovereign exposures, central bank reserves, derivatives at fair value).
Data dependency: the GAR is only as good as the taxonomy data disclosed by borrowers. As CSRD taxonomy disclosure matures (Wave 2 companies reporting from 2028), bank GAR calculations will improve significantly. Currently, most large corporate borrowers are CSRD Wave 1 reporters — smaller companies in the lending book have no taxonomy disclosure obligation yet.
Asset managers and taxonomy alignment
For asset managers, EU Taxonomy alignment is disclosed at the portfolio level — what percentage of the fund's assets are invested in taxonomy-aligned economic activities?
For SFDR Article 9 funds (sustainable investment objective): taxonomy alignment must be disclosed as a minimum investment commitment. The proportion of taxonomy-aligned investments vs other sustainable investments vs other assets must be disclosed in the pre-contractual and periodic disclosures.
For SFDR Article 8 funds (promoting E/S characteristics): voluntary disclosure of taxonomy alignment is increasingly expected, though not mandated as a minimum commitment.
Data challenge: most asset managers calculate taxonomy alignment using third-party data providers (MSCI, Sustainalytics, Bloomberg) because investee taxonomy disclosure is incomplete. As CSRD reporting matures, primary data availability will improve and estimated alignment figures will become more reliable.
Insurance and the Taxonomy
Insurers face a dual taxonomy obligation: on the asset side (investment portfolio taxonomy alignment) and on the underwriting side (insurance products covering taxonomy-aligned activities).
Insurance product taxonomy alignment is the more novel element — insurers are expected to disclose what proportion of their underwriting activity relates to taxonomy-aligned economic activities. An insurer covering a wind farm (taxonomy-aligned) vs a coal plant (taxonomy non-aligned) has different underwriting-side taxonomy exposure.
The technical standards for insurance taxonomy disclosure are less developed than for banks and asset managers. EIOPA (European Insurance and Occupational Pensions Authority) is developing specific guidance — monitor EIOPA publications for the applicable framework for your reporting year.
For insurers: focus first on investment portfolio taxonomy alignment (clearer framework) and prepare for underwriting-side disclosure as standards develop.
Frequently asked questions
What is the typical GAR for European banks currently?
Early GAR disclosures (2023–2025) show most large European banks reporting GARs of 2–8% — reflecting the limited taxonomy disclosure currently available from borrowers. As CSRD Wave 2 taxonomy reporting matures from 2028, GAR figures are expected to rise significantly across the sector.
Can banks include green bonds in their GAR calculation?
Yes — holdings of EU Green Bonds (compliant with the EU Green Bond Standard) and use-of-proceeds green bonds where the proceeds finance taxonomy-aligned activities can be included in the GAR numerator. The EU Green Bond Standard (adopted 2023) requires 100% taxonomy alignment of proceeds — these are the highest-quality green bond assets for GAR purposes.
Does taxonomy alignment affect bank lending rates?
Not directly mandated — the EU Taxonomy is a transparency framework, not a pricing tool. However, several banks have introduced green lending products with preferential rates for taxonomy-aligned borrowers. ECB climate stress tests and regulatory capital treatment discussions may eventually create indirect pricing incentives.