The European Banking Authority (EBA) has published its final guidelines on environmental scenario analysis, outlining how financial institutions across the European Union should assess and manage environmental risks.

The new framework complements the EBA Guidelines on the management of Environmental, Social and Governance (ESG) risks, setting out supervisory expectations on how banks are to conduct environmental scenario analysis in practice.

According to the EBA, the guidelines are designed to strengthen institutions’ capacity to adopt forward-looking approaches in evaluating and managing environmental risks that could affect their operations, resilience, and business models.

The guidance is built around two key pillars. The first involves the integration of environmental risks into existing stress-testing frameworks, allowing banks to analyse short-term financial impacts from environmental factors while ensuring that capital and liquidity levels remain adequate.

The second focuses on resilience analysis, which looks further ahead to examine the medium- to long-term implications of environmental risks and opportunities for banks’ strategies, business models, and risk profiles.

Together, these elements aim to help institutions embed environmental risk considerations more effectively into their overall risk management and strategic planning processes.

The EBA explained that the guidelines will also provide a common reference point for banks and supervisors, ensuring consistent and forward-looking management of environmental risks across the EU banking sector.

The authority emphasised that environmental scenario analysis should not only support compliance but also promote a proactive understanding of climate and environmental challenges, enabling banks to adapt their business decisions accordingly.

The new Guidelines will take effect on January 1, 2027, giving institutions time to align their frameworks, data collection methods, and internal models with supervisory expectations.