Banks Tested by Climate

The European Banking Authority (EBA) published the final guidelines on ESG risk management on 9 January 2025, set to be applied starting 11 January 2026 (with a one-year extension for less complex institutions). These guidelines constitute a strategic regulatory response to the challenges posed by climate change and other environmental, social and governance factors, with the explicit aim of strengthening the resilience of the European banking system.

Within the EBA's sustainable finance strategy, the new guidelines represent an essential pillar of the EU banking package implementation plan. Under Directive 2013/36/EU (CRD), the EBA is tasked with defining minimum standards and common methodologies to enable credit institutions to systematically identify, assess, manage and monitor ESG risks, with particular attention to environmental risks related to climate change. In this sense, the guidelines constitute an essential methodological reference for the systematic integration of ESG risks into banking governance, risk management processes and strategic planning.

One of the key pillars of the new provisions concerns aligning the banking system with the European Union's climate neutrality objectives by 2050, as established by Regulation (EU) 2021/1119 ("European Climate Law"). This objective implies a profound transformation of the European economy, following a low-carbon, climate-resilient model consistent with the Paris Agreement and the UN 2030 Agenda for Sustainable Development.

The climate transition, however, is not without financial implications: the shift towards a carbon-free economy involves transition risks, such as technological obsolescence, changes in consumer preferences and capital reallocation. Added to these are physical risks, arising from the increased frequency and severity of extreme climate events (e.g. floods, droughts, fires) and the chronic effects of global warming, such as desertification, biodiversity loss and sea-level rise. Integrating these risks into banking strategies is not just a precautionary measure, but a necessary condition to ensure long-term financial stability, prevent systemic shocks and support an efficient allocation of capital towards activities compatible with climate objectives. In this sense, the EBA guidelines operate as an enabling regulatory instrument for ecological transition.

The guidelines impose a profound rethinking of banking risk management models. Institutions are called upon to identify, measure, manage and monitor ESG risks, with particular emphasis on environmental and climate risks. These risks must be integrated into capital risk assessment processes (ICAAP), risk appetite definition, internal controls and internal and external reporting systems. Banks are required to develop specific climate risk management plans, with deadlines, measurable objectives and intermediate milestones, aligned with European climate targets and — for transnational entities — also with climate regulations of third countries.

Particular attention is paid to assessing the materiality of ESG risks through multidimensional methodological approaches, based on granular data and prospective scenarios. The context justifying these measures is characterized by an increasing exposure of the financial sector to physical and transition risks, arising from environmental factors (e.g. extreme climate events, biodiversity loss), social factors (e.g. human rights, health, digitalization) and governance factors (e.g. corruption, leadership deficiencies).

Climate change represents a global systemic risk capable of compromising the orderly functioning of financial markets. Unlike traditional risks, climate risk is characterized by extended and uncertain time horizons, non-linear but cumulative effects, and presents complex interconnections between physical, economic, social and geopolitical risks. In this context, banks must develop predictive and adaptive capabilities superior to those of the past. Climate risk management can no longer be limited to a compliance function but must become an integral part of the competitive strategy, business model and organizational culture of financial intermediaries.

The EBA guidelines constitute a fundamental step towards a more resilient, transparent and sustainable banking model. In an increasingly interconnected and vulnerable economy, the integration of ESG risks — and particularly climate risks — represents a systemic necessity and an institutional responsibility. The banking sector's ability to actively contribute to the transition towards a net-zero emissions economy by 2050 will be crucial not only for financial stability but for the socio-economic resilience of the European Union as a whole.