From 2026, the European Banking Authority’s guidelines will require banks to mitigate environmental, social and governance risks through comprehensive strategies, reporting systems and alignment with EU sustainability goals. Photo: EBA

From 2026, the European Banking Authority’s guidelines will require banks to mitigate environmental, social and governance risks through comprehensive strategies, reporting systems and alignment with EU sustainability goals. Photo: EBA

Banks and financial institutions operating in the euro area must embed environmental, social and governance risks in their frameworks and implement transition plans covering at least 10 years under new guidelines issued by the European Banking Authority, with smaller institutions given until 2027 to comply.

The European Banking Authority its final guidelines on the management of environmental, social and governance (ESG) risks on Thursday 9 January 2025. Spanning 151 pages, the guidelines aim to strengthen euro area banks and financial institutions’ resilience by outlining measures for identifying, measuring, managing and monitoring ESG risks.

The EBA clarified that the guidelines align with the requirements of the Capital Requirements Directive (CRD6) . This directive requires the EBA to establish minimum standards and reference methodologies for ESG risk management.

ESG risk management

The EBA stressed the increasing significance of ESG risks, particularly environmental risks driven by physical and transition factors, which can affect traditional financial risk categories such as credit, market, operational and reputational risks. The guidelines aim to safeguard the soundness of financial institutions as ESG risks grow in complexity during the EU’s transition to a sustainable economy.

Institutions are required to integrate ESG risks into their regular risk management frameworks, including their risk appetite, internal controls and internal capital adequacy assessment processes (ICAAP). To achieve this, institutions must perform regular materiality assessments of ESG risks using sound data processes and methodologies, such as exposure-, portfolio- and sector-based analyses, along with portfolio alignment and scenario-based approaches. 

The guidelines mandate institutions to develop detailed transition plans to address financial risks stemming from the EU’s regulatory objectives, including the goal of climate neutrality by 2050. These plans must adopt a forward-looking approach, considering short-, medium- and long-term horizons, with a minimum time frame of 10 years.

The EBA recommended several tools for managing ESG risks, including engaging with counterparties to mitigate financial risks associated with the transition to a sustainable economy. Institutions must also implement robust internal reporting systems that track ESG risks using both backward- and forward-looking metrics.

Timeline

The guidelines will apply to most banks and financial institutions from 11 January 2026. However, small and non-complex institutions will have until 11 January 2027 to achieve compliance.

The full 151-page report is available .

Related articles