EBA issues guidelines to bolster ESG risk management and scenario analysis

The European Banking Authority (EBA) continues to lead the charge in sustainable finance with the publication of its final guidelines on the management of Environmental, Social, and Governance (ESG) risks. Additionally, EBA has proposed the guidelines on ESG scenario analysis, with the consultation period for these guidelines ending on April 16, 2025. Both sets of guidelines will come into effect on January 11, 2026 for most institutions, while small and non-complex institutions will have until January 11, 2027. These publications mark a crucial step toward integrating ESG considerations into the core of financial risk management practices across the banking sector in the European Union.

The ESG risk guidelines outline the necessary internal processes and ESG risk management arrangements that institutions must implement in line with the Capital Requirements Directive (CRD6). The guidelines emphasize that institutions should:

• Accurately identify and measure ESG risks using robust data processes and a combination of methodologies, including exposure-based, portfolio-based, sector-based, portfolio alignment, and scenario-based approaches.

• Integrate ESG risks into risk management frameworks while considering their potential to drive traditional financial risks such as credit, market, operational, reputational, liquidity, business model, and concentration risks.

• Adopt a comprehensive approach to managing and mitigating ESG risks over the short, medium, and long term, with a minimum time horizon of 10 years.

These ESG risk guidelines are designed to be complemented by the proposed guidelines on ESG scenario analysis. These guidelines distinguish between the scenario analysis used to test financial resilience to severe shocks in the short to medium term (and verify capital and liquidity adequacy) and the challenges to the long-term resilience of a business model to navigate an uncertain future. The proposed guidelines address:

• Different uses of scenario analysis and advise institutions to adopt a progressive and proportionate approach to incorporating scenario analysis into their management systems.

• Prerequisites for conducting scenario analysis, including criteria for setting scenarios and identifying transmission channels to translate climate risks into financial risks.

• Unique aspects of climate stress tests to consider when conducting climate stress tests, in addition to the requirements set out in the guidelines on institutions’ stress testing. Furthermore, they emphasize the use of scenarios to help define and adjust an institution’s strategy and test the robustness of its business model against a range of plausible futures.

These recent publications from EBA advance the agenda of integrating sustainability within the banking sector. By providing clear guidelines and frameworks, the EBA aims to enhance the resilience of banks and promote a more sustainable and responsible approach to finance. Such efforts are crucial to addressing the growing importance of ESG considerations in today's global economy.

Related links

• Guidelines on ESG risk management

• Proposed guidelines on scenario analysis