European Banking Authority Launches Consultation on Guidelines on ESG Scenario Analysis

On 16 January 2025, the European Banking Authority (EBA) launched a public consultation on its draft guidelines on ESG scenario analysis. The draft guidelines have been developed in line with the EBA’s roadmap on sustainable finance as part of the planned EBA’s actions for the implementation of the EU banking package.

These guidelines complement the EBA guidelines on management of ESG risks, published on 9 January 2024 relating to minimum standards and reference methodologies for the identification, measurement, management, and monitoring of ESG risks by institutions. For further information on those guidelines, please refer to our blog post. Together, the two guidelines deliver on the mandate laid down in Article 87a (5) of the Capital Requirements Directive (CRD VI).

The guidelines establish expectations for:

• developing a framework and utilising scenarios to aid decision-making in a dynamic economic and physical environment;
• testing an institution’s financial resilience, capital, and liquidity against ESG-related shocks, starting with climate; and
• evaluating the resilience of business models under various plausible scenarios, including achieving climate neutrality in the EU by 2050.

These guidelines focus more specifically on the role of scenario analysis in fostering institutions’ resilience against environmental risks, starting with climate. They are built around the distinction between scenario analysis used (1) to test the institution’s financial resilience to severe shocks in the short to medium term and verify its capital and liquidity adequacy, and (2) to challenge the business model resilience of the institution, including in the long term, and help it navigate an uncertain future.

For institutions using the IRB approach for calculating the own funds requirements for credit risk, these guidelines are also intended to specify how ESG risks, and in particular physical and transition risks stemming from climate change, are taken into account in the scenarios used for credit risk internal stress testing. In this respect, these guidelines aim to fulfil the mandate of Article 177 (2a) of Regulation (EU) No 575/2013.

The consultation runs until 16 April 2025. The EBA will conduct a virtual public hearing on the consultation paper on 17 March 2025, from 14:30 to 16:00 CET.

Latham & Watkins will continue to monitor the release of further FAQ documents relating to the ESG requirements globally.