In these weeks in which climate issues are discussed internationally at COP 30 in Brazil, the European Banking Authority (EBA) published the Guide to Climate Scenario Analysis and which banks will have to start implementing from January 2027. On the other hand, the European Central Bank (ECB) also published an article in its site to state that the way each bank manages climate risks will influence the value of the collateral given when a bank obtains a loan from the Eurosystem.
The idea that the requirement for reporting on how organizations manage ESG issues is decreasing is not correct. The European Commission may be reviewing the sustainability reporting guidelines that apply to financial and non-financial companies, to make them more focused and less ambitious in the data they collect, but the ECB recognizes that climate and ESG risks are financial risks, and therefore requires banks to incorporate them into their risk management, which has repercussions on risk analysis and capital requirements. These ECB demands on banks will mean that all companies that use bank loans and other financial products will have to be able to respond to how they manage ESG risks. Sooner or later, the price of money – the interest rate – will also reflect this management.
Furthermore, the ECB has already explained that risks related to climate change will be incorporated into the credit ratings associated with banks that obtain loans from the Eurosystem. In reality, banks can only borrow from the central bank if they provide assets with adequate credit quality, measured based on ratings. However, if credit ratings do not adequately reflect climate risks, the Eurosystem could end up accepting overvalued and high-risk assets or applying insufficient safeguards. Therefore, the ECB’s climate action plan for 2021 made it a priority to integrate climate risks into all relevant elements of its guarantee framework, with a special focus on credit ratings, now requiring that climate change be taken into account in all credit ratings used in its guarantee framework.
The EBA also published the Guide to ESG Risk Management which comes into force in January 2026, and the Guide to Climate Scenario Analysis which comes into force in January 2027. But there is more climate and ESG regulation on Banks.
Delegated Regulation 2024/1623 (CRR3) amends prudential standards (including Pillars 1 and 2) so that ESG risks are considered when determining capital requirements. And Directive 2024/1619 (CRD6) introduces governance rules, risk management and increased powers for supervisors. In other words, ESG themes and risks become a prudential matter, with a direct impact on the solidity of institutions. Additionally, Pillar 3 reinforces transparency by requiring detailed disclosures about how ESG risks impact institutions’ portfolios and strategies. Also by January 2026, banks will have to present prudential transition plans, that is, they will have to present clear strategies on how they are managing ESG risks, with goals, scenarios and monitoring mechanisms. These plans will be evaluated by supervisors within the scope of the SREP (Supervisory Review and Evaluation Process), ensuring that they do not remain on paper. These prudential transition plans constitute a decisive step towards aligning the financial sector with the European Union’s climate and social objectives.
In short, we can say that banks are no longer mere observers and are now active agents of the climate transition and good ESG practices, because if they do not do so, their risk as a financial institution will increase. They will have to invest in data, technology and training. But they will also gain a competitive advantage because whoever leads this change will be better prepared to face risks, attract investors who value sustainability and to obtain financing from the Eurosystem.
The ECB and EBA send a clear message: ESG is not optional. It is an integral part of financial stability, and therefore it will be an integral component of the new monetary policy where climate and ESG risks are recognized as financial risks capable of generating economic instability. And as such they need to be well managed by everyone: Banks, Companies and the State.
PhD, CEO da Systemic