EBA guidelines stress alignment of transition plans with EU requirements 

The European Banking Authority has unveiled new guidelines for banks to improve their climate risk management with transition plans, marking a significant step towards strategic and more systemic action on climate risk. Released in January 2025, the guidelines require banks to analyse their deviation from climate goals, set targets and define actions for risk mitigation.

Compared to current methods of analysing climate risk, the updated framework now explicitly acknowledges the link between banks’ climate transition and risk management processes. The EBA’s approach also advocates for greater consistency with other European Union regulatory frameworks, supporting the suggestion that there should be one single transition planning process within the bank. The new guidelines also provide guidance on metrics and methodologies which promote comparability.

These improvements are welcome as climate action is lagging. Banks face constant challenges in managing climate risks and are still in the early phases of transition planning, with inconsistent methodologies, lack of transparency and lack of action. Although the International Energy Agency states that new oil and gas fields and coal mines are not compatible with a 1.5-degree Celsius scenario, banks are still financing fossil fuel expansion. Even the European Central Bank suggests European banks are substantially misaligned with the transition and indicates voluntary commitments have little impact on decarbonisation.

Voluntary climate transition plans and commitments are mostly regarded as a paper exercise, amounting to a symbolic gesture that might not lead to any real-world effects. This poses severe risks to financial stability. Not being prepared for the transition introduces transition risks and poses systemic risks for the wider financial system, hence the need for binding guidance and stricter supervision.

Analysing misalignment with climate goals 

The recently published EBA guidelines follow the renewed banking regulation package including the Capital Requirement Directive. The CRD now requires European banks to develop a plan to address the financial risks related to environmental, social and governance criteria and their role in the transition towards a sustainable economy. These transition plans should include an analysis of the deviation of the bank’s portfolio with relevant EU objectives, such as the EU climate targets for 2030 and 2050 and the European Climate Law. The guidelines also require banks to understand the potential implications for their business model and to link that to risk mitigation. This means setting targets and defining actions to mitigate the transition risks from not being aligned with the transition.

How a transition plan can be used for both risk management purposes and strategic steering is an area the EBA guidelines also provide guidance with. It states that banks should ensure the scenarios used in their plans are consistent across the organisation: aligning scenarios used for risk management with scenarios used for target setting and strategy building.

Towards more consistency across regulations 

In a push for greater regulatory consistency, the EBA emphasises the importance of aligning CRD-based transition plans with other European reporting requirements such as the Corporate Sustainability Reporting Directive and Corporate Sustainability Due Diligence Directive. Although the scope and the goal of the various transition plans differ, the guidelines require ‘a single comprehensive strategic planning process covering all regulatory requirements’. This is a major step forward and welcome news, given the current pressure to reduce the regulatory burden for businesses and to streamline the CSRD, the CSDDD and the EU Taxonomy (Omnibus simplification package announced by the European Commission). Aligning the requirements around transition plans avoids duplications and inconsistencies.

Towards harmonised risk management processes 

To ensure these plans are sound, the guidelines state that financial supervisors should assess their robustness as part of the supervisory review and evaluation process. Calculating financed emissions and the banks’ deviation from climate goals is a complex exercise for which different methodologies can be used. It also requires the use of climate scenarios for different sectors, all heavily relying on assumptions and narratives.

The EBA guidelines mark an important step towards harmonising metrics and methodologies for transition plans. The required metrics listed in the guidelines is a good starting point. It requires bank to report financed emissions in absolute value, the financing of harmful activities and the ratio of financing fossil fuel versus low-carbon technologies. Harmonising metrics and methodologies provides supervisors with a better view of banks’ preparedness on the transition, the resulting financial risks and the systemic risks in the financial system.

Opportunity for banks and supervisors 

The EBA’s new guidelines are setting a clear standard for European banks when it comes to transition planning and climate risk management. This is especially welcome given worrying developments around voluntary climate commitments in the US.

Although not explicitly defined, we believe there is space for a supervisory role to assess the banks’ calculation of its misalignment from EU climate goals and the credibility of the targets and actions. This improves the current prudential processes and provides supervisors with a better view of the risks to financial stability. It also provides an opportunity for the supervisor to provide guidance on methodologies in order to promote comparability which in turn eases their supervisory processes.

For banks, it is important to integrate transition plans in risk management and align risk management processes with strategic action on climate change. Banks should not treat these transition plans – and more broadly, environmental risk management exercises – as only a compliance exercise but as a strategic opportunity to become more resilient and more sustainable.

This blog was originally published at OMFIF on 29 January 2025.