ESG risks: EBA sets minimum standard for the management of ESG risks
The European Banking Authority (EBA) has set a milestone with the final guideline on the management of environmental, social and governance risks (ESG risks).
The guideline aims to integrate ESG risks into the internal management and risk management processes of credit institutions in order to strengthen their resilience to short, medium and long-term challenges. This includes climate-related risks as well as social and governance aspects.
These new requirements, which will become mandatory from January 2026 (for small and non-complex institutions from January 2027), create a uniform European minimum standard for the management of ESG risks.
This minimum standard sets the following priorities:
- Materiality assessment:
- Annual assessments of ESG risks are mandatory (every two years for small institutions). A time horizon of at least 10 years applies in order to assess financial impacts across different risk categories.
- Methodology for risk analysis:
- Exposure-based: ESG factors must be incorporated into credit decisions and risk classifications.
- Scenario-based: Institutes should carry out resilience tests with scientifically sound scenarios.
- Portfolio-based: Heat maps and sector analyses are designed to identify risks and minimize concentrations.
- Integrated risk management:
- ESG risks must be integrated into the risk strategy, the internal processes for ensuring risk-bearing capacity (ICAAP and ILAAP processes) and risk limitation.
- Short, medium and long-term risk minimization targets must be clearly defined.
A particular focus is on planning the transition to a climate-neutral economy. Financial institutions are required to develop plans to adapt their business models and ensure the resilience of their portfolios to transitional and physical ESG risks.
Smaller institutions benefit from simplified requirements, for example with regard to the frequency of assessments or data complexity. Nevertheless, they are still obliged to implement the core requirements.
Recommendations for financial institutions
- Early integration: ESG risks should be integrated into all business and risk strategies immediately.
- Gap analysis: on existing requirements such as the Minimum Requirements for Risk Management (MaRisk)
- Training: Management and employees must be continuously trained on ESG issues.
- Data management: A robust database is essential in order to effectively measure and manage ESG risks.
The new EBA guideline is a wake-up call for all financial institutions to adapt their processes and adopt a proactive approach to ESG risks. We are happy to support you in implementing these requirements efficiently and sustainably.
