European Banking Authority publishes draft guidelines on ESG scenario analysis

The European Banking Authority has published a consultation paper on its draft guidelines on ESG scenario analysis. For institutions using the internal ratings-based approach for calculating the own funds requirements for credit risk, these guidelines are intended to specify the way in which 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. They: (i) specify the different uses institutions should make of scenario analysis and propose a progressive and proportionate approach to incorporating scenario analysis into the institution management system; (ii) provide guidance on what is required before undertaking a scenario analysis and more specifically on the criteria for setting scenarios and identifying the transmission channels for translating climate risks into financial risks; and (iii) specify the distinctive features to be taken into account when conducting a climate stress test in addition to the requirements set out in the guidelines on institutions' stress testing and the use of scenarios to help define and adjust the institution's strategy and test the robustness of its business model to a range of plausible futures. These guidelines complement the EBA guidelines on the management of ESG risks, published earlier this month. The EBA will hold a virtual public hearing on the consultation on March 17, 2025, and the deadline for comments is April 16, 2025. The EBA plans for the guidelines to be finalized by the second half of 2025, and apply from January 11, 2026 to institutions other than small and non-complex institutions and, at the latest, from January 11, 2027 for SNCI.

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