EBA tightens ESG rules as climate risk grows

Following this announcement, Europe’s financial regulator for banks mentioned that lenders in the bloc must regularly and comprehensively measure ESG risks, in new guidelines that were designed in order to shore up the industry amid growing threats to financial stability from environmental and social factors.

In addition, the European Banking Authority mentioned that ESG risks pose challenges to the overall safety and soundness of institutions and companies, possibly affecting all traditional categories of financial risks to which they are exposed. 

More information on the announcement

Banks and financial institutions are expected to employ scenarios in order to identify, prepare for, and mitigate potential risks from individual exposures, as well as at a portfolio level and across multiple industrial sectors. At the same time, particular consideration should be given to the fossil fuel industry, while also including measures that should include quantitative targets for financed emissions. 

The new guidelines come as fresh data shows insured losses globally from natural catastrophes were more than double the 30-year average in 2024, with raging fires in Los Angeles suggesting more damage in 2025. Furthermore, banks and financial institutions, like other businesses, increasingly face legal risks as climate activists leverage the courts.

Meanwhile, there is also a growing divide in how US and European banks tackle climate change. Regulators and policymakers in the region of Europe have been tightening requirements for disclosing and preparing for potential ESG risks. In its new guidelines, which have been months in the making, the EBA also mentioned that banks should look at least 10 years into the future, assess customers’ dependency on fossil fuels, and review their net zero transition plans.

Finally, banks and financial institutions are expected to report the potential financial risk impact from clients and users that aren’t aligned with net zero emissions by 2050, while also considering the amount of capital they need to absorb losses and be prepared for environmental-related litigation risks.