ESG in the banking sector – additional guidelines on managing ESG risks

Background

On 9 January 2025, the European Banking Authority (EBA) published its Final Report on guidelines on the management of environmental, social and governance (ESG) risks (Risk Guidelines).

The Risk Guidelines are aimed at competent authorities and institutions, i.e. credit institutions, as well as investment firms authorised under Article 8a (3) of the Capital Requirement Directive (CRD VI).

The EBA has been mandated to publish these Risk Guidelines in order to detail how to identify, measure, manage and monitor ESG risks, including the content of the transition plans to be prepared by institutions in accordance with Article 76 of CRD VI.

On 16 January 2025, the EBA launched a public consultation on its draft Guidelines on environmental, social and governance (ESG) scenario analysis (Draft Scenario Guidelines).

The Draft Scenario Guidelines are intended to complement both the Risk Guidelines and the EBA guidelines on institutions’ stress tests by providing a structured approach for institutions to integrate ESG scenario analysis into their risk management frameworks.

Key findings

The Risk Guidelines set out requirements for the internal processes and ESG risk management arrangements that institutions should have in place to ensure the resilience of their business models and risk profiles. For example, institutions should:

• ensure that they are able to properly identify and measure ESG risks.
• develop and use the minimum reference methodologies given in the Risk Guidelines to assess ESG risks. Institutions still have flexibility to develop the specific details.
• consider ESG risks as potential drivers of all traditional categories of financial risks and integrate these into their regular risk management framework, thus ensuring consistency with overall business and risk strategies.
• consider ESG risks over short, medium and long-term horizons, with the long-term horizon defined as at least 10 years.
• develop specific plans, known as CRD plans, that aim to address the risks arising from the economic transition towards environmental objectives and are informed by regularly updated materiality assessments and developed based on a forward-looking approach. These should remain consistent with the transition plans imposed under other European rules and regulations.

It should be noted that smaller and non-complex institutions are allowed, subject to the results of their materiality assessments, to monitor a subset of indicators and use simplified scenarios, ensuring proportionality in the application of the Risk Guidelines.

The Draft Scenario Guidelines specify:

• the criteria for defining the scenarios that institutions should use to test their resilience to the negative impacts of ESG factors and inform strategic decisions

• the way in which ESG factors, and in particular climate factors, should be integrated into stress testing programmes over time

The Draft Scenario Guidelines provide further assistance to institutions that are using the internal ratings-based approach to assess capital requirements when incorporating scenarios that include ESG risks as part of their credit risk stress tests.

Next Steps

The Risk Guidelines will apply from 11 January 2026, except for small and non-complex institutions, for which they will apply from 11 January 2027, at the latest.

The EBA is consulting on the Draft Scenario Guidelines for a period of three months. Feedback from the public consultation will be considered when finalising them.

It is planned that the Draft Scenario Guidelines will be finalised by the second half of 2025 and apply to institutions (excluding small and non-complex institutions) from 11 January 2026 and to small and non-complex institutions from 11 January 2027, at the latest.

Authors: Adam Zerrouk and Sophie Selftsick