Regulatory clarity on the horizon: EBA introduces new guidelines that bring a shining light to the fog of uncertainty
The European Banking Authority (EBA) has released new guidelines on Environmental, Social, and Governance (ESG) risk management, aiming to strengthen the banking sector's role in promoting sustainable finance and supporting the transition to a low-carbon economy in Europe.
The guidelines emphasize the importance of robust materiality assessments, proactive client engagement, and forward-looking risk management.
Strengthened Internal Governance and Risk Oversight
The EBA's revised draft guidelines call for banks to incorporate ESG risks into their internal governance frameworks. This includes ensuring that risk, nomination, remuneration, and audit committees have the necessary expertise to assess and manage ESG risks consistently with the institution's risk appetite.
Enhanced ESG Risk Disclosure and Transparency
From 2024, the EBA's Banking Package (CRR3) mandates banks to report environmental physical and transition risks separately, disclose total exposure to fossil fuel sectors, and explain ESG risk integration in business strategy and governance. Although the enforcement of detailed ESG Pillar 3 disclosures, including the Green Asset Ratio, has been temporarily deferred, these future disclosures will increase transparency on banks’ fossil fuel exposures and support monitoring of progress towards low-carbon targets.
Consistent ESG Risk Stress Testing
In June 2025, the EBA and other European Supervisory Authorities proposed guidelines to standardize ESG risk stress testing across banks and insurers. Such stress tests simulate potential impacts of climate and ESG risks on financial institutions' resilience, encouraging proactive risk management aligned with the transition to a low-carbon economy.
Alignment with EU Sustainability Regulation Evolution
The EBA’s ESG-related regulatory activities are closely linked to evolving EU frameworks, such as the Corporate Sustainability Reporting Directive (CSRD) and Taxonomy Regulation. The EBA’s measures help prepare banks to comply with these regulations and to direct capital flows consistent with the EU’s climate goals, despite some regulatory postponements and adjustments to reduce burdens.
CRD-Based Transition Plans
The CRD-based transition plans, while not a disclosure requirement, represent a risk-based, forward-looking overview of a bank's resilience to ESG risks. Starting in 2026, large banks will need to fully integrate ESG risks across their traditional risk management frameworks and prepare CRD-based transition plans for prudential supervisors. Relevant national prudential authorities will assess these plans under the Pillar 2 Supervisory Review and Evaluation Process (SREP).
Client Engagement and Materiality Assessments
Engagement with clients is advocated as an effective risk mitigation tool in the guidelines. However, the guidelines do not set minimum thresholds for materiality assessments, which could potentially compromise their ambition and robustness. It is unclear whether banks could face supervisory actions or penalties under the assessment of the CRD-based transition plans.
The guidelines require banks to develop a single, comprehensive strategic planning process and allow for 'less sophisticated processes' for non-large banks. If too many firms are excluded from mandatory reporting requirements, it could potentially undermine banks' CRD-based transition planning processes.
The EBA argues that risk management should be forward-looking, supported by credible scenario analysis. Banks should use this holistic approach to ensure consistent transition plans for prudential and regulatory purposes.
The European Commission's Competitive Compass promises to deliver simplification in sustainability reporting obligations for smaller firms, including SMEs. The first omnibus is expected to be published at the end of February, leading to intense debates about simplification needs and maintaining Europe's climate ambitions.
The guidelines aim to orient banks' financial flows towards real economy transition needs. By promoting a more resilient, transparent, and governance-driven banking sector, the EBA's measures facilitate financing of decarbonization efforts while managing financial stability risks posed by climate change and transition dynamics. This facilitates the European Union’s broader ambitions for a just and effective transition to a low-carbon economy by integrating sustainability considerations into banking supervision and business practices.
Banks should strengthen their ESG risk management by incorporating ESG risks into their internal governance frameworks, ensuring that risk, nomination, remuneration, and audit committees have the necessary expertise to assess and manage ESG risks consistently with the institution's risk appetite. In the future, banks will be required to report environmental physical and transition risks separately, disclose total exposure to fossil fuel sectors, and explain ESG risk integration in business strategy and governance.
The EBA's guidelines on ESG risk management in the banking sector aim to facilitate financing of decarbonization efforts, orienting banks' financial flows towards real economy transition needs, and thereby supporting the European Union's broader ambitions for a just and effective transition to a low-carbon economy by integrating sustainability considerations into banking supervision and business practices. This is achieved through strengthened internal governance and risk oversight, enhanced ESG risk disclosure and transparency, consistent ESG risk stress testing, alignment with EU sustainability regulation evolution, CRD-based transition plans, client engagement, and materiality assessments.
