The (GAR) green asset ratio is a financial measure used to assess the sustainability of a company or investment portfolio. It is calculated by dividing the total value of a company’s or portfolio’s environmentally friendly assets by the total value of all of its assets.
The GAR is a new KPI for EU banks, intended to provide a standard and comparable measure of the percentage of a lender’s assets invested in environmentally sustainable projects and activities. It’s a part of a major effort to accelerate the adoption of sustainable banking practices, where the European Banking Authority (EBA) has taken a decisive step by announcing that starting in 2024, about 150 large EU lenders will be required to disclose this new metric.
But before further talking about the GAR and the current challenges for banks, it’s worth taking a step back and reminding what the EU Taxonomy is. It is a framework for classifying and identifying environmentally sustainable activities. It comprehends a set of technical screening criteria determining whether an economic activity can be considered environmentally sustainable.
By providing a common classification system for sustainable activities, the EU Taxonomy serves as a tool for green finance. It is intended to help financial market participants identify environmentally sustainable economic activities and channel capital toward that. So, as easy to understand, the EU taxonomy and GAR are strictly related to each other and serve the same purpose of transitioning to a greener financial system and economy.
