EU banking regulator sets out capital-based transition plan rules

February 1, 2024|Written by |European Banking Authority

The European Banking Authority (EBA) has issued a consultation in preparation for a set of ESG rules that are focused on growing risks from the environment, as well as transition risks.

The proposed standards set out standards for banks to identify, measure, and monitor ESG risks and include a requirement for transition plans based on the capital requirement directive (CRD).

EU financial institutes need to be able to manage ESG risks, but the forward-looking nature and lack of historical experience mean that understandings, measurements and management can differ across institutions, the EBA said.

An institution’s plans should cover both the short, medium, and long-term, including a period of at least 10 years.

The EBA noted there have been several shortcomings in including ESG risk in business strategies and that the management of such risk “is still in early stages”.  These shortcomings could “pose challenges to the safety and soundness of institutions as the EU transitions towards a more sustainable economy and ESG risks become increasingly substantiated or materialise”.

The rules are on top of other EU legislation, like the corporate sustainability due diligence directive, which requires transition plans that are focused on the ability of business models to meet the EU’s objectives of reaching net zero by 2050.

The EBA said its plans differ from other regulations in that they take a “risk-based view and contribute to the overall resilience of institutions”. The guidelines were developed in line with the EBA’s sustainable finance roadmap, which sets out the banking regulators’ plans around sustainable finance.

The plans are not meant to encourage institutions to divest from carbon sectors but instead to “proactively reflect” on the changes in a transition and to “prepare or adapt accordingly.”

The consultation is open until 18 April.

This page was last updated February 2, 2024

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