ESG in the banking sector – publication of Circular CSSF 26/905 on the application of EBA guidelines on managing ESG risks

The aim of Circular CSSF 26/905 is twofold:

• integrating the Risk Guidelines in the administrative practice of the CSSF, and
• amending Circular CSSF 21/773 on the management of climate-related and environmental risks (Circular CSSF 21/773).

Background

The European Central Bank (ECB) has, since 27 November 2020, formalised its prudential expectations concerning the management and disclosure of climate-related and environmental risks for significant institutions under its supervision in its Guide on climate-related and environmental risks (Guide) for banks.

On 21 June 2021, the CSSF published Circular CSSF 21/773, which outlines how it expects credit institutions under its supervision to consider and integrate climate-related and environmental risks into their operations. Circular CSSF 21/773 is consistent with the Guide and applies to Luxembourg credit institutions designated as less significant institutions (LSIs) under the single supervisory mechanism (SSM) and to all branches of non-EU credit institutions.

On 9 January 2025, the EBA published its Risk Guidelines.

The Risk Guidelines apply, among others, to all banks, applying the proportionality principle for small and non-complex institutions (SNCIs) and other non-large institutions. The Risk Guidelines follow the classification of entities under the Capital Requirements Regulation (CRR) and not the classification of institutions under the SSM.

The Risk Guidelines were intended to have an impact on the Guide and Circular CSSF 21/773, and their scope goes beyond climate-related and environmental risks to cover ESG risks.

The Risk Guidelines apply from 11 January 2026, except for SNCIs, for which the guidelines will apply at the latest from 11 January 2027.

For additional details on the Risk Guidelines, refer to our Arendt newsflash on the Risk Guidelines here.

Key takeaways

The CSSF informs LSIs that it applies the Risk Guidelines.

The CSSF further specifies that Circular CSSF 26/905 (and thus the Risk Guidelines) applies to LSIs other than SNCIs from 1 April 2026, and to SNCIs from 11 January 2027.

In this context, Circular CSSF 21/773 is amended as follows:

• specification of the scope of application of the Risk Guidelines in Luxembourg: the CSSF specifies that institutions in Luxembourg shall comply with the Risk Guidelines.
• narrowing of the scope of application: the amended Circular CSSF 21/773 applies only to SNCIs until 10 January 2027 and to third-country branches.

This reflects the application calendar of the Risk Guidelines

The CSSF has also published a very helpful table that summarises the rules regarding the entry into application of the Risk Guidelines for different types of institution, which can be accessed here.

Next steps

Regulators have clear expectations with regard to the identification and management of ESG risks and the need to implement robust ESG risk frameworks that integrate ESG considerations into the risk management processes. LSIs in particular are encouraged to start implementing appropriate ESG risk identification and management systems as soon as possible.

Author : Sophie Selftsick