Guidelines on Management of ESG Risks
The European Banking Authority (EBA) officially releases guidelines on management of ESG risks, aimed at providing European banking institutions with standards and methods for identifying, measuring, and managing ESG risks.
The European Banking Authority believes that ESG risk may be a potential driving factor for traditional financial risk, and banking institutions need to apply risk management tools to reduce short-term, medium-term, and long-term ESG risk.
Related Post: European Banking Authority Releases Drafts on ESG Risk Management
Background of Guidelines on Management of ESG risks
The European Banking Authority believes that ESG risk management is still in its early stages, and there are differences in the understanding, measurement, and management of ESG risks among different banking institutions. With the sustainable economic transition and development of the European Union, ESG risks may have a greater impact. As the regulatory body for the European banking industry, the European Banking Authority needs to monitor financial risks arising from ESG factors and assess the impact of ESG risks on the short-term, medium-term, and long-term risk situation and solvency of banking institutions.
The European Banking Authority has incorporated ESG risk into some guidelines and standards, such as the Guidelines on Loan Origin and Monitoring, which incorporate ESG risk into credit risk policies, and the Guidelines on Internal Governance, which incorporates ESG risk into governance arrangements. In the future, ESG risks will be included in policies such as the Guidelines on Fit and Property Assessment and the Guidelines on Remuneration Policies and will be consistent with Guidelines on Management of ESG risks.
Introduction to Guidelines on Management of ESG risks
The Guidelines on Management of ESG risks require financial regulatory agencies in EU member states to comply with and incorporate them into practice. The guidelines cover the ESG risk management process of banking institutions and are an important part of the overall risk management framework. This guide will apply to banking institutions other than small and non-complex institutions starting from January 11, 2026, and will apply to small and non-complex institutions no later than January 11, 2027.
The Guidelines on Management of ESG risks require banking institutions to conduct at least one material ESG risk assessment annually, mapping ESG risks to traditional financial risk categories. Banking institutions need to consider the likelihood of short-term, medium-term, and long-term (at least ten years) ESG risks occurring and their potential financial impacts, as well as their impact on credit, market, liquidity, operations, and reputation risks. Materiality evaluation requires the use of both qualitative and quantitative information and includes both physical and transitional risks.
For independent environmental, social, and governance risks in ESG risk, the guidelines stipulate that banking institutions need to quantify climate related risks and correctly understand the potential impacts of other environmental risks, establishing key risk indicators including short-term and medium-term. For social and governance risks, banking institutions can first qualitatively assess their financial risks and gradually improve their assessment methods by developing more advanced qualitative and quantitative indicators. Banking institutions also need to consider the connection between these three types of risks.
Banking institutions need to incorporate ESG risks into their regular risk management systems and processes, and develop methods to manage and mitigate short-term, medium-term, and long-term ESG risks. The guidelines provide the following risk management tools:
- Collaborate with counterparties to understand their risk profile and ensure alignment with their own risk preferences.
- Adjust business processes and terms based on risk strategies and internal capital policies.
- Incorporate ESG risks into global, regional, and industry risk exposure measurement methods.
- Diversify loans and investment portfolios according to ESG risk standards.
- Adopt risk management tools that align with risk preferences to enhance the risk resistance capabilities of different departments.
Banking institutions need to regularly review and update their risk management plans, considering new materiality assessments, available scenarios, benchmarks, and industry pathways, as well as the impact of current or upcoming regulatory policies.
Reference:
EBA Publishes Its Final Guidelines on the Management of ESG Risks
