In Short
The Situation: Against the backdrop of the comprehensive recast of European Union ("EU") banking legislation, the EU legislator is increasingly focused on Environmental, Social, and Governance ("ESG") risks. In this context, ad hoc provisions on ESG risk management have just been added to the EU legal framework.
The Result: Credit institutions will have to implement new strategies and policies to identify, manage, and monitor ESG risks. By 10 January 2026, the European Banking Authority ("EBA") will issue guidelines specifying details and criteria to be complied with by credit institutions in ESG risk management.
Looking Ahead: Even though credit institutions were already subject to certain obligations under EU legislation related to the avoidance and management of ESG risks, the aim of the EU legislator is now to create a more wide-ranging regulatory framework to ensure the appropriateness of ESG strategies and risk management.
On 19 June 2024, Capital Requirements Directive (EU) 2024/1619 of the European Parliament and of the Council, amending Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 (the "CRD VI"), was published in the European Official Journal.
Among the various amendments, a new article 87a ("Article 87a") has been added by CRD VI within the amendments of Directive 2013/36/EU. The article, "Environmental, social and governance risks," is aimed at enhancing the management of ESG risks within credit institutions.
In essence, Article 87a restates the need for ESG risks to be substantially included in credit institutions' risk management frameworks (already provided for by Directive 2013/36/EU) and establishes criteria that credit institutions must comply with.
Article 87a is an open provision, mainly addressed to competent authorities, which must adopt appropriate measures to implement its contents.
First, pursuant to Article 87a, credit institutions must have robust and proportionate strategies and policies to identify, measure, manage, and monitor ESG risks. Management of ESG risks must be made in short, medium, and long perspectives and included within the governance arrangements of such institutions. This may lead credit institutions to revise their governance arrangements to make them compliant with Article 87a and any other provision and measure adopted by competent authorities to implement Article 87a.
Moreover, pursuant to Article 87a, credit institutions should test their resilience to negative impacts of ESG factors, including climate-related issues. Such tests must consider various credible ESG scenarios based on those elaborated by international organizations. In this case, competent authorities are responsible for ensuring the correctness of the resilience testing processes adopted by the credit institutions.
Development of credit institutions' practices related to ESG risk management and planning will be assessed by competent authorities, who will also consider the offering of sustainability-related products by credit institutions, as well as transition finance policies, related loan origination policies, and ESG-related targets and limits. Consequently, based on the wording of Article 87a, evaluation of ESG policies will become part of the supervisory activities of the competent authorities, who will be entitled to cooperate with specific national, international, or European authorities or public bodies operating in the supervision of climate change and environmental risks.
This should lead to a comprehensive legal and regulatory framework aimed at controlling ESG policies as a whole, with the involvement of different authorities, both at a national and EU level, to obtain a more harmonized framework on environmental policies, including in the banking and finance field.
Finally, the last paragraphs of Article 87a are addressed to the EBA. According to Article 87a, by 10 January 2026, EBA will issue guidelines to specify certain details of the ESG policies to be complied with by credit institutions as well as the contents of the specific plans to be prepared by them.
Specifically, the EBA guidelines referred to above will include:
- Minimum standards and methodologies that credit institutions must follow for identifying, measuring, managing, and monitoring ESG risks.
- Contents of the ESG risk monitoring plans to be prepared by credit institutions.
- Criteria for assessing the impact of ESG risks on the risk profile and solvency of credit institutions.
- Criteria for setting the aforementioned ESG scenarios.
Such guidelines will periodically be updated by EBA.
In a nutshell, Article 87a represents the EU legislator's intent to include ESG risks within credit institutions' strategies and processes permanently. This will likely impact the controls made by supervisory authorities and could drive credit institutions to innovate their internal policies to implement management measures for ESG risks.
Therefore, one of the main challenges for credit institutions is ensuring that the provisions issued by the EBA, which implement the CSRD VI, are transposed in a timely manner. This is crucial for preparing ESG monitoring plans that comply with the regulation and for adapting and updating them as necessary. Tracking the relevant provisions and assessing the adequacy of the measures implemented are key to effectively ensuring a full compliance with the new regime.
For more on CRD VI, see our previous Commentary: "CRD VI and the New EU Third-Country Branch Regime: Harmonization Means Restricted Access."
Three Key Takeaways
- Credit institutions must implement internal policies and processes aimed at identifying, measuring, managing, and monitoring ESG risks, and updating such policies where applicable.
- The development of credit institutions' practices regarding ESG strategies and risk management will be assessed on an ongoing basis by competent authorities.
- By 10 January 2026, the EBA will issue guidelines specifying details and criteria to be complied with by credit institutions in ESG risk management.
