The European legislator considers that banks are at the heart of the energy transition, as they could redirect capital flows towards sustainable projects by financing green innovation and renewable energy. This is why Europe has adopted the CRR III and CRD VI directives, which require banks to integrate climate risks into their fund management.
In this context, the European Banking Authority (EBA) has been tasked with clarifying the concrete application of these new directives and published recommendations in January 2025, which we will try to decipher in this article.
Five key takeaways from these new EBA recommendations
1. Define a clear, robust, long-term strategy
ESG risks should be a key concern for financial institutions. According to the latest World Economic Forum report, the four major risks of the next 10 years are related to the environment: extreme weather events, loss of biodiversity, changes in land systems, and scarcity of natural resources.
To address these issues, the EBA emphasizes the importance of a proactive and structured approach to identifying, measuring and managing these risks. It recommends integrating ESG risks into the strategic processes of institutions, in particular by extending the planning horizon to 10 years and testing their resilience to various scenarios. These recommendations are also in line with the new European CSRD and CSDDD regulations.
As a reminder, the CSRD requires companies to disclose their ESG impact, while the CSDDD makes them accountable for managing environmental and social risks throughout their value chain. Note that discussions are currently underway on a simplification of the CSRD and a postponement of the CSDDD.
2. Adapting ESG risk assessment to the company and its sector
The EBA emphasizes the importance of adapting the risk analysis, reporting and management strategy to the specific context of each institution. Each analysis must take into account the size and complexity of the activity, the stakeholders and the particularities of the sector.
For example, a bank specializing in fossil fuels will be more exposed to transition risks than a bank dedicated to renewable energies. It is in anticipation of these risks that HSBC announced in 2022 the end of financing for new oil and gas exploration projects, in line with the EU's carbon neutrality objectives and COP28 commitments.
3. Identify and assess risks
The EBA recommends that institutions assess the impacts of the main ESG risks on their finances, exposure and associated benefits. This includes transition risks (changes related to the transition to a low-carbon economy) and physical risks (impacts of extreme weather events and long-term climate change).
The EBA proposes several methodological options for analyzing these risks:
- Based on exposure: Assesses a portfolio's exposure to ESG risks by sector or asset.
- Alignment of portfolios and sectoral portfolios: Analyzes the alignment of the portfolio with the sector's climate and ESG objectives.
- Based on scenarios: Tests the resilience of the portfolio to different ESG scenarios, such as climate change.
4. Build a structured and coherent plan to support the transition
The EBA recommends that financial institutions develop a clear and structured transition plan. This plan must be aligned with obligations such as due diligence (verification of sustainability risks) and sustainability reporting (communication of ESG impacts).
The plan should include precise objectives, concrete actions and measurable targets based on scientific scenarios, such as the trajectories defined by the European Green Deal, which aims to make Europe carbon neutral by 2050, or by the SBTI (Science Based Targets Initiative), which helps companies define science-based climate targets.
The plan must include precise objectives, concrete actions and measurable targets, taking into account the geographical location, the size of the organization and the time horizons. The EBA recommends clear governance, time-bound indicators and an implementation strategy tailored to short-, medium- and long-term challenges.
5. Implement appropriate data management and monitoring
Monitoring ESG risks requires continuous monitoring with early warning indicators and thresholds to be monitored, including revenues from polluting sectors (such as fossil fuels), past and forecast financial losses, and the location of key assets.
The EBA emphasizes the importance of proper data management: internal and external data, such as that of stakeholders, must be collected, structured and analyzed.
Institutions must also carry out due diligence, i.e. verify the practices of the companies with which they work, particularly with regard to social and governance criteria, as well as compliance with laws and regulations.
Finally, in the absence of precise data, it may be necessary to rely on expert judgment or qualitative assessments to complete the analysis.
Preparing for these new guidelines
The EBA recommendations provide a useful conceptual framework for banks in their ESG management.
The EBA emphasizes the crucial importance of ESG data for assessing risks, defining related scenarios and strategies, and anticipating financial impacts. Without reliable and accurate collection, it is impossible to effectively manage environmental, social and governance risks. An efficient monitoring system makes it possible to follow key indicators in real time, such as exposure to polluting sectors or physical risks. This monitoring guarantees compliance with regulatory requirements and strengthens the resilience of institutions.
Some companies, such as Greenscope, offer solutions for structuring, analyzing and exploiting ESG data effectively, using advanced technologies and AI. As this data is collected by bank advisors from their clients, the absence of a tool such as Greenscope introduces a significant workload. These tools facilitate compliance with regulations by automating part of the process while making the data more reliable.
Sopra Steria, with its network of partners and its expertise in data management, is very well positioned to support banks in this energy transition. By automating the collection of customer data, its structuring and the deployment of tools on a large scale, its ESG experts help to build solid scenarios, develop effective strategies and guarantee reporting in accordance with regulatory requirements.