The guidelines published by the EBA in January 2025 aim to frame scenario analysis for the management of environmental, social, and governance (ESG) risks by financial institutions. They specify how to integrate climate-related risks into internal credit stress testing, focusing on financial resilience against environmental shocks. These guidelines promote a progressive and proportionate approach to incorporating…
The document titled "Guidelines on environmental scenario analysis" was published by the European Banking Authority (EBA) in November 2025. It is a 77-page guide (44 pages provided) specifying criteria and methodologies for conducting environmental scenario analyses, particularly related to climate risks, in the European banking sector. The scope covers environmental risks, with a focus on physical and transition risks related to climate change, for financial institutions subject to Directive 2013/36/EU (CRD) and Regulation (EU) No 575/2013 (CRR), notably those using the Internal Ratings-Based (IRB) approach for credit risk. The application period is set for January 1, 2027. Social and governance factors are not included in this guide, their integration being planned for future updates (p. 1-7, 19-23).
This EBA guide aims to frame the use of environmental scenario analysis by financial institutions to anticipate and manage risks related to environmental factors, mainly climatic. Scenario analysis is defined as a process enabling the exploration of a range of plausible future states to assess their impact on institutions' strategy and risk exposure. This document complements previous ESG risk management guidelines published in January 2025, specifying notably how to integrate physical and transition risks into internal credit risk stress tests, in accordance with regulatory requirements (Article 87a(5) of the CRD and Article 177(2a) of the CRR). The importance of scenario analysis lies in its ability to strengthen financial resilience in the short term (less than five years) via stress tests, and in the medium-long term (at least ten years) via business model resilience analysis facing an uncertain and evolving environment. The guide recommends a progressive and proportionate approach, considering risk materiality, institution size and complexity, and the maturity of available methodologies. It emphasizes the need to identify transmission channels of environmental risks to financial variables, to use credible scenarios from recognized organizations (NGFS, IPCC, IEA, etc.), and to adopt cross-functional and rigorous governance. The limits of traditional macroeconomic models are highlighted, notably their difficulty to integrate non-linear environmental risks, tipping points, and long-term uncertainties. The guide sets an application date of January 1, 2027, with a capacity-building phase expected before then. Finally, it recommends using scenario analysis not only as a risk assessment tool but also as a strategic lever to adapt business models and seize opportunities related to the ecological transition (p. 3-4, 5-18, 24-35).
Environmental risks, notably climatic, represent a growing source of challenges for the economy and the financial sector, due to extreme physical events, ecosystem degradation, and pressures on natural resources. These risks affect all traditional categories of financial risks (credit, market, operational, liquidity, business model). The European Commission and legislation (notably CRD VI Directive and CRR Regulation) require financial institutions to test their resilience against these risks via credible scenarios, relying on harmonized methodologies. This guide responds to the regulatory mandate to establish minimum standards and reference methodologies for environmental scenario analysis, complementing ESG risk management guidelines published in January 2025. The objective is to help institutions integrate a forward-looking dimension into their risk management and strategy, considering uncertainties and long time horizons inherent to environmental risks. The guide specifies the limited scope to environmental risks (mainly climatic), excluding for now social and governance factors, due to lack of structured data and mature methodologies in these areas. It highlights specific challenges related to the extended time horizon, new risk transmission channels, and fundamental uncertainty on global economic evolution. Finally, it stresses the need for a proportionate approach according to risk materiality and institution size, as well as cooperation between institutions, supervisory authorities, and other stakeholders (p. 5-18).
Definition and role of scenario analysis:
- Process of identifying and assessing plausible future states to anticipate impacts on strategy and risks.
- Key tool to manage uncertainty, strengthen resilience, and seize opportunities linked to the ecological transition.
- Complement to traditional stress tests, with qualitative and quantitative dimensions.
Governance and integration:
- Need for robust internal governance, involving senior management and a cross-functional approach.
- Development of a coherent and credible narrative serving as the basis for scenarios.
- Rigorous documentation of assumptions, methodological choices, and results.
Proportionality:
- Adaptation of sophistication, frequency, and scope of analyses to risk materiality, institution size, and complexity.
- Small institutions may use qualitative approaches or simplified sensitivity analyses.
- Large institutions should progress towards more sophisticated quantitative approaches.
Identification of transmission channels:
- Analysis of pathways through which environmental risks (physical and transition) affect financial variables.
- Consideration of direct and indirect impacts via the value chain and local economy.
- Consideration of mitigating or amplifying factors (insurance, counterparties' transition plans, government measures).
Scenario development:
- Use of credible scenarios from recognized organizations (IPCC, NGFS, IEA, IPBES, EEA, etc.).
- Consideration of socio-economic, technological, consumer preference, climate policy, energy system, sectoral trajectory, and emission level factors.
- Scenarios adapted according to time horizon (short term for stress tests, long term for resilience analysis).
- Internal consistency of scenarios between key factors.
Environmental stress tests:
- Integration of environmental factors into existing stress tests, especially for IRB institutions.
- Use of baseline and severe but plausible adverse scenarios.
- Analysis of compound risks and concentration effects.
- Fine sectoral and geographical modelling.
- Progressive approach to integrating environmental risks into credit, market, operational, and liquidity risk models.
Business model resilience analysis:
- Assessment of capacity to maintain strategy and profitability over at least 10 years.
- Projection of key indicators under baseline and alternative scenarios.
- Consideration of feedback loops related to financial sector adaptation.
- Alignment with transition plans and regulatory obligations.
- Use of dynamic or constrained assumptions according to strategy.
Limits and caution:
- Recognition of limits of traditional macroeconomic models facing environmental risks (non-linearities, tipping points, uncertainties).
- Importance of not overinterpreting quantitative results.
- Need for expert judgment to compensate for data and model gaps.
- Importance of the analysis process to foster strategic thinking and cross-functional collaboration.
Monitoring and updating:
- Regular monitoring of scientific, regulatory, and economic developments.
- Adaptability and modularity of analyses to integrate new knowledge.
- Model validation, comparison with external sources, and use of sensitivity analyses.
Future perspectives:
- Planned revision of guidelines according to methodological and regulatory advances.
- Potential extension to social and governance factors when methodologies mature.
- Monitoring of international work (BCBS, NGFS, etc.) for harmonization and improvement of practices.
Established facts:
- Environmental risks, notably climatic, impact all categories of financial risks.
- European regulation requires institutions to test their resilience via credible scenarios.
- Scenario analysis is an essential tool to integrate a forward-looking dimension into risk management.
Assumptions:
- Scenarios must cover short horizons (up to 5 years) for stress tests and long horizons (at least 10 years) for resilience analysis.
- Scenarios must be based on recognized scientific resources but adapted to institutions' specificities.
- Progression in analysis sophistication must be proportionate to risk materiality and institutions' capacities.
Interpretations:
- Scenario analysis promotes better preparation for environmental shocks and strategic adaptation.
- The complexity and inherent uncertainty of environmental risks require a cautious and multidimensional approach.
- Governance and cross-functional collaboration are key to analysis robustness.
Uncertainties:
- Traditional macroeconomic models have limits to model environmental risks, notably non-linear effects and tipping points.
- Evolution of social and governance risks remains difficult to integrate due to lack of data and mature methodologies.
- The precise impact of public policies and technological innovations on environmental risks is uncertain.
- Risk materiality may evolve rapidly, requiring regular updating of analyses.
The EBA recommends that financial institutions progressively integrate environmental scenario analysis into their risk management and strategy frameworks, considering the specificities of climate and environmental risks. Institutions must:
- Develop robust governance involving management and a cross-functional approach.
- Identify and model transmission channels of environmental risks to their financial exposures.
- Use credible scenarios from recognized organizations, while adapting them to their context.
- Conduct short-term stress tests to assess financial resilience and medium-long term resilience analyses to test business model viability.
- Apply the proportionality principle according to risk materiality and internal capacities.
- Exercise caution in interpreting results, complementing quantitative analyses with expert judgment.
- Ensure scientific and regulatory monitoring to regularly update scenarios and methodologies.
- Supervisory authorities should adopt a pragmatic approach, allowing progressive capacity building of institutions.
The application date is set for January 1, 2027, allowing time for capacity development. These guidelines will be revised according to methodological advances and future integration of social and governance factors (p. 3-4, 44-46, 19-37).
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