Legal development

Embedding ESG Risk Management:  The EBA's recent guidelines for ESG risk management and scenario analysis

By Edmund Bosworth, Becky Clissmann, Lorraine Johnston, Maria-Laure Knapp and Elena Lambros

13 February 2025

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    What you need to know

    • Twelve months ago, Ashurst described the launch of the EBA's public consultation on its then draft guidelines on the Management of ESG Risks as Preparing for 'perfect storms'. Those standards have now been finalised and will take effect for large EU Financial Institutions from 11 January 2026.
    • The final guidelines incorporate the consultative feedback by clarifying language and detail, as opposed to making substantive changes.
    • The EBA has also released draft guidelines on ESG scenario analysis, for feedback by April 2025. Their content further clarifies requirements for this aspect of ESG risk management. The ESG Scenario Analysis guidelines are also intended to take effect from 11 January 2026.

    What you need to do

    • The primary focus of both documents is the embedding of ESG risk management in business-as-usual considerations in FIs. To that end, the documents are likely to have global influence as regulators in other jurisdictions consider how best to ensure their financial systems are resilient to the risks associated with a changing climate and the transition to a net zero economy.

    The finalisation of the EBA's Guidelines on the Management of ESG Risks addresses the ESG elements of three of four risk management responsibilities entrusted to the EBA under the Capital Requirements Directive (2013/36/EU) (CRD IV) and associated Regulation (EU) 575/2013. The EBA has also released a consultation paper on how to incorporate ESG considerations into scenario analysis that addresses the fourth and final element.

    The Guidelines are accompanied by a concordance to the EU's Corporate Sustainability Reporting Directive (CSRD) and the feedback received during the public consultation that ran between January and April 2024. Consultation on the draft ESG scenario guidelines is running from January to April 2025 and it is expected that the guidelines will be finalised mid-year so that the two documents can take effect from the same date.

    Large EU-regulated Financial Institutions will need to comply with the ESG risk management guidelines (and likely the ESG scenario analysis guidelines) from 11 January 2026. Small and non-complex institutions must comply by 11 January 2027.

    The Basel Committee for Banking Supervision's 2022 principles for the management of climate-related climate risk remain the blueprint for subsequent regulation for FIs' climate risk management efforts. Despite the extension from climate to ESG risk management in the title, the EBA's newly finalised Guidelines do not introduce a significant number of additional risks to manage. With one-third of the jurisdictions represented on the Basel Committee having banks regulated by the EBA, these guidelines will influence regulatory and supervisory stances across the world.

    The Guidelines set explicit requirements for FIs to embed ESG risks as drivers of traditional financial risks (credit, market, liquidity, operational and strategic) and to update their financial risk models, limits, policies and reporting to reflect ESG implications.

    When embedding ESG risk drivers in financial risk frameworks, FIs should evaluate the alignment between their portfolios and industry-level climate-related pathways and targets, including measuring the impact of achieving UN Sustainable Development goals. The EBA does not dictate that lending portfolios should be aligned to specific climate pathways, but obliges organisations to explicitly recognise the risk of misalignment.

    The guidelines mandate that FIs prepare transition plans and embed transition objectives into their regular decision-making processes and risk management frameworks. Recognising that FIs cannot manage their ESG risks without their suppliers and customers also reducing greenhouse gas emissions, the Guidelines stipulate that FIs must engage with customers about their ESG ambitions. Reviewing published ESG reports is not regarded as sufficient engagement.

    The draft ESG scenario analysis guidelines reinforce the focus on transition by introducing Climate Resilience Analysis, a long-term scenario analysis process intended to evaluate the compatibility of the organisation's business model with a 1.5 degree temperature pathway. Large Financial Institutions, whose resilience depends on the resilience of the economy as a whole, must use scenario analysis to understand and proactively manage the changes in an economy as it transitions to net zero.

    Want to know more?

    Read our previous article in this series:

    This publication is a joint publication from Ashurst Risk Advisory Pty Ltd, Ashurst LLP and Ashurst Risk Advisory LLP, which are part of the Ashurst Group.

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