EU Regulator Tightens Control Over ESG Risk Management for Banks

The European Banking Authority (EBA) has introduced new guidelines on managing ESG risks, which will come into effect on 11th January 2026, with small and non-complex institutions given an extended deadline of 11th January 2027. The guidelines require banks to assess and manage physical, transition, and social risks related to climate change, set quantitative targets for reducing financed emissions, and develop long-term forecasts, focusing on sectors with high carbon intensity such as energy and transport. Financial institutions must also provide transparent reporting on their climate impact, reserve capital for potential ESG-related losses, and support clients in adopting sustainable practices. These measures aim to strengthen financial stability and support the EU’s carbon neutrality objectives by 2050.

In January 2025, the European Banking Authority (EBA) has issued new guidelines aimed at improving the management of environmental, social, and governance (ESG) risks within the EU banking sector. These measures are designed to mitigate threats to financial stability arising from climate change, social factors, and governance issues.

The Guidelines will come into effect on 11th January 2026, with the exception of small and non-complex institutions, for which the Guidelines will apply no later than 11th January 2027.

Key Provisions of the Recommendations:

• ESG Scenario Analysis
  Banks are required to implement detailed scenario analysis to identify, assess, and manage ESG risks. This analysis must take into account:
  • Physical risks: The consequences of climate change, including risks such as flooding, drought, and extreme weather events, which may affect clients' assets;
  • Transition risks: Associated with changes in legislation, technologies, and consumer preferences within the shift towards a low-carbon economy. For example, increased carbon taxes may impact the profitability of fossil fuel enterprises;
  • Social risks: Such as the impact on employment and working conditions due to the introduction of green technologies.
• Sector Vulnerability Assessment
  Special attention is given to sectors with high carbon intensity, such as energy, metallurgy, and transport. Banks must assess how well their clients are aligned with the goals of the Paris Agreement and their ability to reduce their carbon footprint. For example, organisations in the fossil fuel sector must provide clear plans for emission reductions and diversification of their activities.
• Setting Quantitative Targets
  Financial institutions must develop specific targets for reducing financed emissions in line with the goal of achieving carbon neutrality by 2050.
• 10-Year Forecasting Horizon
  The guidelines require banks to develop long-term forecasts covering at least 10 years. These forecasts must include an analysis of:
  • Clients' dependence on fossil fuels;
  • The likelihood of achieving key climate goals, including carbon neutrality;
  • Potential financial consequences for banks if clients fail to adapt in a timely manner.
• Ensuring Sufficient Capital to Cover ESG Risks
  Banks are required to allocate capital to address potential losses linked to the declining credit quality of assets affected by climate change and to cover possible legal actions stemming from non-compliance with environmental standards. For instance, there is a risk of lawsuits from activists opposing the financing of environmentally harmful projects.

Banks are required to disclose comprehensive information regarding the climate impact of their activities, including the reporting of financed emissions (Scope 1, 2, and 3), progress towards climate goals, and potential financial losses in cases where clients fail to meet their targets.

Financial institutions must support their clients in adapting to sustainability requirements. For example, they may offer green technology financing or initiate training programmes for partners on sustainable management.

Challenges and Solutions

A key challenge is the lack of data and experience for long-term ESG risk analysis. Solutions could include the adoption of international standards such as GRI and ISO, alongside the engagement of specialised consulting firms.

Furthermore, a restructuring of business processes and employee training will be necessary. Banks can address these challenges by integrating ESG metrics into their management processes and actively collaborating with regulators and partners.

Conclusions and Business Benefits

The EBA’s recommendations lay the foundation for sustainable development within the banking sector, enabling organisations to:

• Reduce risks associated with climate change and social responsibility;
• Strengthen their reputation by committing to ESG principles;
• Attract more clients and investors focused on sustainable development.

These measures also enhance the competitiveness of banks, ensuring their resilience in the face of global change.