Bank transition plans should be compatible with other EU climate rules, EBA says

EU banks will need to measure their ESG risks and develop transition plans that are aligned with the bloc’s climate targets and rules, the European Banking Authority (EBA) has said.

“ESG risks, in particular environmental risks through transition and physical risk drivers, pose challenges to the safety and soundness of institutions and may affect all traditional categories of financial risks to which they are exposed,” the EBA’s new guidelines state.

The regulator has laid out how banks should identify and measure risks at an individual, portfolio and industry level. Special consideration should be given to exposure to the fossil fuel sector and institutions will need to collect data on how dependent banks are on fossil fuels.

Financial institutions should also have a plan to manage and mitigate risks over at least 10 years. These transition plans should be “a single, comprehensive strategic planning process that covers all regulatory requirements stemming from applicable legislation” such as the corporate sustainability reporting directive and corporate sustainability due diligence directive (CSDDD).

In other words, banks should not need to conduct multiple exercises or duplicate their work to fulfil the regulatory guidelines but can instead build upon one single exercise, said Vincent Vandeloise, a senior researcher and advocacy officer at Finance Watch.

The EBA is not setting additional disclosure requirements but is instead setting guidelines for requirements that already exist, he added.

“I think what the EBA has done comes at the right time, because they indeed highlight that this is not a question of duplicating the work… or creating other requirements compared to [the] CSDDD. It’s a single plan,” he said.

The guidelines were released amid a widening gap between how European and US banks approach climate change risk. While US banks and regulators have withdrawn from numerous climate groups and bodies, the EU and other global central banks have said they plan to move ahead without them.

Meanwhile, the European Commission plans to release an omnibus package on 26 February to potentially cut back on sustainability reporting requirements, after EU elections swung the European parliament to the right and increased pressure to boost Europe’s economy. Numerous companies have spoken out against the omnibus package, arguing it would weaken the climate rules.

Under the EBA guidelines, banks will need to assess the potential risks of having portfolios not aligned with the EU’s net-zero emission target of 2050. While transition plans do not have to be in line with the Paris Agreement, they will need to account for that misalignment.

“The goal of [prudential transition] plans is not to force institutions to exit or divest from greenhouse gas-intensive sectors,” the guidelines state, but is instead meant to help institutions reflect and prepare for changes posed by the transition to a green economy.

Vandeloise at Finance Watch commended the EBA for going further than the initial guidelines and highlighting the importance of client engagement, which is “really fundamental in the general sustainable finance framework”.

“It’s not that we just want to divest, we want to push for transition. And in that sense, they highlighted that it is a risk-mitigating measure, but also to the extent that it effectively leads to positive actions on the side of the investee companies,” he said.

Financial institutions are required to have climate transition plans in early 2026, except for small and non-complex companies which have until 2027 to submit their plans.

Separately, the EBA is seeking public comment on draft guidelines for how banks should incorporate ESG scenario analysis into their risk management frameworks to ensure that their businesses are resilient to climate-related risks, including testing for capital and liquidity. Comments are open until 16 April.

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