ESG in the Banking Sector – final EBA Guidelines on environmental scenario analysis

Background

The Scenario Guidelines complement the EBA Guidelines on the management of environmental, social and governance (ESG) risks published on 9 January 2025 (Risk Guidelines) and the EBA Guidelines on institutions’ stress testing.

The Scenario Guidelines aim to:

• detail the criteria for setting the scenarios that institutions should use to test their resilience to long-term negative impacts of ESG factors, particularly climate-related factors, in accordance with Article 87a(3) of Directive 2013/36/EU (CRD);
• integrate environmental factors into stress testing and define the criteria that can be used to test the institution’s resilience to short-term negative impacts of environmental factors; and
• specify, for institutions using the internal ratings-based approach, the criteria for institutions to define and use stress test scenarios that include environmental risk drivers as part of their stress testing programmes on credit risk in accordance with Article 177(2a) of Regulation (EU) No 575/2013 (CRR).

Key points

The Scenario Guidelines provide guidance on the preparation of the environmental scenario analysis.

Scenario analysis is considered as a key tool enabling banks to anticipate environment-related changes and embed forward-looking thinking into strategic decisions and risk management.

The scenario analysis is interrelated, and should be consistent, with plans to address ESG risks in the short, medium and long term developed in accordance with CRD and with transition plans disclosed in accordance with Directive (EU) 2022/2464 (CSRD).

The Scenario Guidelines distinguish between the scenario analysis used for short-term stress tests to verify capital and liquidity adequacy, and that used for medium-to-long-term resilience analysis to challenge the sustainability of institutions’ business models.

While the draft guidelines on ESG scenario analysis referred to ESG scenario analysis, the Scenario Guidelines focus on environmental scenario analysis, in particular climate-related factors. The EBA confirms that this is consistent with its mandate, as the CRR and CRD both refer to the inclusion of ESG risks in the scenarios and make specific references to environmental factors, particularly climate-related ones. The EBA considered that approaches regarding social and governance factors were not sufficiently mature to be included within the scope of the Scenario Guidelines. Institutions are nonetheless encouraged to gradually extend the scope of ESG factors in their scenario analysis.

The sophistication, scope and frequency of the scenario analysis should be proportionate with, among others, the materiality of environmental risks, the maturity of available methodologies and practices, the institution’s size and business model, and the complexity of its activities.

Next steps

The Scenario Guidelines will apply from 1 January 2027. However, Directive (EU) 2024/1619 (CRD VI) (provided it is implemented into Luxembourg national law) and the Risk Guidelines become applicable from 11 January 2026. Given the challenges and the importance of scenario analysis, institutions are expected to take proactive measures to develop their capacity in these areas.