EU: Banks should measure ESG risks and develop "transition plans" aligned with regulatory requirements, says European Banking Authority - Business & Human Rights Resource Centre

Guidelines on the management of environmental, social and governance (ESG) risks, European Banking Authority

"Banking transition plans should be consistent with other EU climate rules, says EBA"

EU banks will have to calculate their EESG risks and produce transition plans that are consistent with the climate objectives and standards of the bloc, the European Banking Authority (EBA) has advised.

"ESG risks, in particular environmental risks resulting from transition and physical risk drivers, constitute threats to the stability of institutions and may affect all the classic categories of financial risks to which they are exposed," the EBA's new guidelines state.

The regulator has explained how banks should identify and quantify risks from an individual, portfolio and sectoral perspective. In particular, the attention should be paid to the exposure to the fossil fuel industry and banks will have to know how much they are dependent on fossil fuels.

Financial entities should also have a plan for handling and reducing risks for at least 10 years. These transition plans should be "a single, integrated strategic planning process that covers all legal requirements arising from the applicable legislation" including the corporate sustainability reporting directive and the corporate sustainability due diligence directive (CSDDD)...