EU: EBA consults on CRD VI draft guidelines on ESG Scenario Analysis

The EBA is consulting on Draft guidelines on ESG Scenario Analysis.

These guidelines are to be issued pursuant to the EBA’s mandate under Article 87a(5) of the Capital Requirements Directive VI (CRD VI) to issue guidelines on the identification, management, measurement and monitoring of ESG risks, and encompassing ESG related scenario analysis (including stress testing) as an important tool of an institution’s risk management framework.  On 9th January 2025, the EBA published Guidelines on the management of ESG risks (see our note here) which covered a large part of that mandate.  The guidelines in the present consultation are intended to:

• complement those earlier guidelines and set out the criteria for setting the scenarios that institutions should use to test their business and financial model resilience to the negative impacts of ESG factors; and
• for institutions using the IRB approach, to assist the use of scenarios that include ESG risks, as part of their credit risk stress tests.

Specifically these are intended to fulfil the EBAs mandate at Article 87a(5)(d) CRD VI, and Art 177(2a) CRR.

We set out a few of the key highlights of the draft guidelines below:

Broad Expectations – Vison and effective governance: At the heart of any scenario analysis is an institutions vision of the most likely evolution of the business in which they operate –the EBSA expects institutions to define a credible and coherent narrative describing this vision – endorsed by management and supported by good governance processes, and used where appropriate throughout the entire organisation.

The EBA expects institutions to develop and implement scenario analysis (which takes into account both financial and business model resilience) gradually, with a view to embedding it in the entire management system of the institution.  

Proportionality and learning curve: Institutions are expected to focus on material ESG risks in order of materiality (this requires appropriate mapping of ESG risks and transmission channels) in relation to sectoral and geographical exposure.  As new data becomes available (including counterparty transition plans) or as modelling approaches develop, institutions are expected to update their scenario analysis and develop their approach accordingly.  

Steps for Scenario analysis – what is required before undertaking a scenario analysis, the criteria for scenario setting, and transmission channels for translating climate risks into financial risks: The EBA invites comments on the detailed steps it proposes for scenario analysis, which covers the (i) setting of climate scenarios (with reference to recent scientific knowledge as elaborated by the likes of the NGFS and EU JRC, or national government bodies) and (ii) how institutions should identify and define the relevant macro and microeconomic transmission channels to use in their climate scenario analyses

Scenario analysis development processes and use in decision making: The EBA sets out guidelines on (i) the features to be taken into account when conducting a climate stress test in addition to the requirements set out in the EBA’s Guidelines on institutions’ stress testing (2018) and (ii) the use of scenarios to help define and adjust the institutions strategy and test the robustness of its business model to a range of plausible futures.

Next Steps
The consultation closes on 16 April 2025. The EBA is planning to finalise the guidelines by the second half of 2025 and apply them from 11 January 2026 to institutions, other than small and non-complex institutions to which they will apply from 11 January 2027 (in line with the management of ESG risk guidelines).  The EBA will be holding a virtual hearing on 17 March 2025 from 14:30-16:00 CET.

The consultation can be found here. The EBA’s press release (including a link to the registration form for the March virtual hearing) is here.