On September 18, the IIF published a “White Paper on an Energy Supply Ratio (ESR) for Bank Disclosures.”

In its simplest form, an ESR compares the amount of a bank's financing to low-carbon energy supply (e.g., renewables) relative to high-carbon energy supply (e.g., oil & gas). The concept has gained interest as a climate-related metric given the shift required in the global energy mix towards low-carbon energy sources in order to meet the goals of the Paris Agreement. Some banks are planning or considering disclosing an ESR as a complementary metric alongside the suite of other climate-related metrics already disclosed by many banks across the world.

The development of an ESR metric requires an individual bank to consider and determine several key design decisions which will impact the meaningfulness, interpretation and comparability of its final disclosed ratio. While it is important that individual banks have sufficient latitude to design disclosure metrics in a way that is appropriate for their business strategy, many investors and other stakeholders seek comparability in disclosed metrics. In this context, the IIF has worked with a group of banking institution members to develop this White Paper to increase understanding of the ESR metric and the range of potential design choices.

The White Paper:

• Summarizes initial banking industry analysis and perspectives on the methodological considerations associated with the metric, and articulate its potential benefits and limitations as a disclosure metric;
• Provides an overview of the key design decisions to develop an ESR at the bank level, and a common language for discussing the metric; and
• Offers an illustrative disclosure approach which could be used to guide a bank’s internal decision making and/or be included in a bank’s disclosures to clearly show the design decisions they have taken.

The ESR ratio is one of many metrics banks can provide stakeholders to share information about their climate-related business strategy in the context of the energy transition. There is no one size fits all approach to designing an ESR that will work for all banks; rather, banks may consider firm-specific business strategy and operating context to construct an ESR ratio that can provide decision-useful information on how the bank’s exposure to different energy sources is changing over time.

It is early days in terms of the industry-led development of ESR metrics. This White Paper aims to be a resource for the industry as the thinking evolves.