Response to consultation on Guidelines on ESG scenario analysis

Question 1: Do you have any comments on the interplay between these Guidelines and the Guidelines on the management of ESG risks?

We observe that the Guidelines on ESG Scenario Analysis represent a logical and necessary extension of the EBA’s broader work on ESG risk management. The articulation of forward-looking scenario tools complements the foundational risk identification, measurement, management, and monitoring principles set out in the 2024 Guidelines on ESG Risk Management.

However, we believe the interplay between the two documents could benefit from greater clarity in the following areas:

1. Scenario Analysis as a Tool for Quantifying Material ESG Risks

The Scenario Analysis Guidelines should more explicitly frame scenario analysis as a tool that enhances the quantification and comparability of ESG risks identified in the original ESG Risk Management Guidelines. RASB's earlier response emphasized the importance of a standardized, accounting-based framework for ESG risk quantification (using metrics such as Risk Units or RUs). While the current Scenario Analysis Guidelines appropriately encourage the development of internal methodologies, they fall short of suggesting standardization that would enhance supervisory convergence across the EU. The linkage between qualitative risk identification and quantitative scenario outputs should be strengthened.

2. Materiality Mapping and Scenario Design

A clearer mapping between the materiality assessments required under the ESG Risk Management Guidelines and the scenario design choices recommended in the new Guidelines would help institutions prioritize their scenario analysis efforts.

The Guidelines could benefit from a visual or tabular framework to guide institutions on how risk materiality translates into the type, scope, and frequency of scenario exercises.

3. Strategic Planning Integration

Both sets of guidelines emphasize the need to embed ESG risk considerations in strategic and capital planning processes. However, there remains ambiguity as to how the outputs of scenario analysis should practically inform ICAAP, business model assessments, and governance processes already influenced by broader ESG risk management activities.

More illustrative examples of this integration would enhance implementation.

4. Risk Data Consistency

The Guidelines on ESG Risk Management rightly stress the importance of robust data, but the Scenario Analysis Guidelines could better address the consistency of data inputs and assumptions across both types of analysis.

RASB recommends developing supervisory expectations for data alignment between qualitative risk registers and quantitative scenario modelling inputs, particularly where firms are adopting hybrid approaches.

5. Feedback Loop Between Scenario Analysis and Risk Appetite

An important interplay that is underdeveloped in both documents is the feedback loop whereby scenario analysis results inform the ongoing calibration of an institution’s risk appetite.

We suggest that future revisions of both guidelines explicitly address how extreme, but plausible ESG scenario outcomes should influence the review and adjustment of ESG risk limits, tolerance thresholds, and escalation triggers.

It is our position that, while the draft Scenario Analysis Guidelines build effectively on the 2024 ESG Risk Management Guidelines, a more cohesive articulation of how the two should function as a unified ESG risk framework would be recommendable.

This would support both supervisory expectations and industry implementation, especially for institutions developing internal ESG risk quantification and capital planning methodologies.

Question 2: Do you have comments on the proposed definition of scenario analysis and its various uses as presented in Figure 1?

RASB welcomes the EBA’s effort to provide a structured definition of ESG scenario analysis and its intended uses, as outlined in Figure 1 of the draft Guidelines. The classification of scenario analysis into tools for strategic planning, business model assessment, risk management, and supervisory engagement is conceptually sound. However, we identify several opportunities for improvement that would enhance conceptual clarity, operational relevance, and consistency with the broader ESG risk framework.

1. Clarifying the Link Between Scenario Types and Their Uses

While the figure maps uses of scenario analysis to strategic and risk functions, the linkages between the different types of scenarios (e.g., exploratory vs. adverse) and their intended uses are not sufficiently clear. For instance, exploratory scenarios are more appropriate for long-term strategic planning, while adverse scenarios are typically used for testing resilience and ICAAP. We recommend that Figure 1 explicitly categorize which scenario types serve which functional purposes to help institutions allocate resources accordingly.

2. Explicit Inclusion of Risk Quantification and Capital Planning

The definition and uses of scenario analysis should explicitly incorporate its role in quantifying non-financial ESG risks and informing risk-adjusted capital planning. As RASB has consistently emphasized, integrating ESG risks into accounting-based risk metrics (such as RUs) is crucial for aligning scenario outputs with capital adequacy assessments. Currently, Figure 1 does not reflect such a link. Including capital planning and provisioning under scenario outputs would strengthen the definition’s operational value.

3. Differentiating Between Use Cases by Institution Type and Maturity

The current framework in Figure 1 could be enhanced by acknowledging that different use cases will be relevant depending on an institution’s size, business model, and ESG maturity. For example, small and non-complex institutions (SNCI) may apply scenario analysis primarily for strategic awareness and qualitative planning, whereas larger banks may use them for granular financial resilience modelling.

Introducing a tiered approach would improve proportionality and implementation feasibility.

4. Feedback Loops and Scenario Iteration

Scenario analysis is not a one-time exercise; it is iterative and should form part of a feedback loop that refines both the institution's understanding of risk and the parameters of subsequent scenarios. Figure 1 would benefit from a visual element or note that emphasizes this iterative nature and its role in continuous risk management and planning refinement.

5. Accounting for Interdependencies Between ESG Risk Categories

Finally, the proposed definition and use cases should reflect that ESG risks are often interdependent. A single scenario can simultaneously stress environmental, social, and governance aspects (e.g., climate change leading to social unrest and regulatory backlash). Scenario design and analysis tools should support multi-dimensional stress testing. This could be clarified in the definition and reinforced in accompanying narrative.

It is our belief that, while Figure 1 and the accompanying definition represent a strong starting point, incorporating clearer mappings between scenario types and use cases, risk quantification, tiered application, iterative processes, and multidimensional risk integration would significantly enhance its utility and relevance for institutions and supervisors alike.

Question 3: Do you have comments on the proposed distinction made between short-term scenario analysis (CST) and longer-term scenario analysis (CRA) as illustrated in Figure 3?

RASB supports the conceptual distinction between Climate Stress Testing (CST) and Climate Resilience Analysis (CRA) as proposed in the Guidelines. Differentiating short-term, adverse scenario tools from long-term, exploratory assessments reflects both regulatory practice and strategic necessity. However, we believe several enhancements are needed to improve clarity, consistency, and alignment with institutional capabilities and supervisory expectations:

1. Clearer Mapping to Time Horizons and Risk Objectives

The current guidance provides a helpful visual (Figure 3) but lacks specificity regarding how institutions should align CST and CRA with distinct time horizons, risk types, and regulatory objectives. For instance, CST could be explicitly linked to Pillar 2 processes and capital adequacy assessment, while CRA could support strategic planning, business model evaluation, and climate transition alignment. Anchoring each in supervisory and institutional use cases would provide needed direction.

2. Integration with ESG Materiality Assessments

RASB recommends further integrating the CST/CRA distinction with ESG materiality assessments. For instance, risks deemed highly material in the near term should be prioritized in CSTs, while long-term, systemic transition risks could drive CRA design. This linkage would create a clear line-of-sight from material ESG risks through to relevant scenario types and timeframes, enhancing both prioritization and coherence.

3. Avoiding Artificial Separation of Interconnected Risks

While it is operationally useful to distinguish short- and long-term horizons, it is important to acknowledge the interconnectedness of certain risks. A near-term policy shock (captured in CST) may trigger long-term shifts in investor behavior or reputational risks (relevant to CRA). The Guidelines should encourage institutions to explore compound scenarios that bridge CST and CRA assumptions to reflect systemic feedback loops and secondary effects.

4. Tiered Expectations by Institutional Maturity

The CST-CRA distinction, while helpful, may overburden less mature or smaller institutions if applied without nuance. The Guidelines should clarify that the depth, frequency, and granularity of both CST and CRA may vary depending on the institution’s complexity and ESG exposure. For SNCI entities, a consolidated CST/CRA approach may suffice, while more advanced institutions could run both tracks in parallel.

5. Quantitative Methodologies and Risk Accounting Alignment

RASB reiterates the importance of aligning both CST and CRA with evolving risk quantification practices. CST, in particular, should allow for mapping of scenario outcomes to expected losses expressed in standardized units (e.g., RUs). CRA, while more qualitative, can also benefit from structured metrics such as ESG-adjusted performance indicators or weighted expected losses across risk types. Including these methodological links would enhance the analytical utility of both tools.

In conclusion, the CST and CRA distinction is conceptually sound and reflects a maturing regulatory approach. To improve implementation consistency, we recommend reinforcing their alignment with risk materiality, introducing tiered application guidance, and integrating them more deeply with both strategic and accounting-based risk management frameworks.

Question 4: Do you have any comments on the interplay between these Guidelines and the Guidelines on institution’s stress testing?

RASB commends the EBA for initiating convergence between ESG scenario analysis and broader stress testing practices. The two exercises are inherently interlinked and, if properly aligned, can strengthen institutions’ risk resilience frameworks and supervisory reporting capabilities. However, we note several areas where the interplay between ESG scenario analysis and institutional stress testing could be enhanced:

1. Clarifying the Relationship to ICAAP and ILAAP

The Guidelines should more explicitly delineate how ESG scenario analysis (particularly CST) complements or integrates into ICAAP and ILAAP processes. For example, ESG scenarios that reveal significant downside capital impacts should naturally feed into internal capital adequacy assessments, influencing capital planning and management actions. Similarly, liquidity-related ESG stress events (e.g. stranded assets or reputation-driven outflows) could inform ILAAP stress testing. Clarifying the conditions and pathways for such integration would reinforce their operational value.

2. Alignment with Existing Stress Testing Frameworks

The Guidelines could provide greater guidance on how ESG-specific scenarios can be embedded into existing macroeconomic or idiosyncratic stress testing frameworks. RASB supports a hybrid integration model whereby ESG variables are introduced into baseline, adverse, or bespoke scenarios to observe compounding effects. Supervisors could offer sample templates or expectations for embedding ESG dimensions into multi-risk stress models.

3. Feedback Loop into Risk Appetite and Capital Allocation

Stress testing — whether ESG-specific or broader — should drive capital planning and the calibration of risk appetite. The current Guidelines emphasize governance and oversight but stop short of detailing how scenario outputs (e.g., ESG-driven losses or impairment projections) are translated into capital buffers or adjustments to risk limits. RASB suggests including explicit mechanisms whereby stress outcomes inform board-level decision-making, including capital reallocation, risk mitigation prioritization, and ESG investment strategies.

4. Enhancing Model Governance and Assumption Traceability

ESG risk drivers, particularly in long-term CRAs, carry a high degree of uncertainty. Institutions may face challenges in harmonizing these with existing stress testing models, which are often calibrated for high-frequency, financially observable risks. 

The Guidelines should encourage robust model governance practices that ensure ESG scenario inputs and assumptions are properly validated, versioned, and challengeable. This is especially critical where ESG stress outcomes are used to support Pillar 2 requirements.

5. Promoting Common Methodologies and Benchmarking

To promote consistency across the EU banking sector, EBA could consider supporting a common library of ESG stress testing methodologies and calibration references, particularly for key risk transmission channels (e.g., carbon pricing, biodiversity loss, or supply chain disruption). RASB sees this as an opportunity to promote convergence without undermining proportionality, allowing institutions to adapt standardized elements to their specific risk profiles.

To summarize, the Guidelines would benefit from more detailed articulation of how ESG scenario analysis informs and interacts with existing stress testing regimes. A clearer integration with ICAAP/ILAAP, consistent methodologies, and feedback into capital planning and governance processes would help bridge current implementation gaps and elevate ESG scenario analysis to a supervisory parity with conventional stress testing.

Question 5: Do you have comments on the Climate Scenario Analysis framework as illustrated in Figure 4?

RASB acknowledges the value of Figure 4 as an illustrative attempt to operationalize the Climate Scenario Analysis (CSA) process through a structured framework. The proposed flow from inputs (e.g., data and assumptions) through scenario development to institutional outcomes (such as business model implications) aligns well with established scenario analysis logic. Nonetheless, we propose the following refinements to enhance the framework’s effectiveness, alignment with supervisory expectations, and usability across institution types:

1. Strengthening the Feedback Mechanisms

The current framework presents the scenario process as largely linear. In practice, ESG and climate scenario analysis is iterative. RASB recommends incorporating explicit feedback loops from outcomes back to scenario inputs and governance processes. These loops should reflect how scenario results trigger recalibration of assumptions, reprioritization of risk drivers, and refinement of strategic and capital plans.

2. Clarifying Data Provenance and Transformation

Figure 4 could better distinguish between raw input data, transformed data (e.g., through forward-looking models or downscaling), and final scenario assumptions. Institutions often struggle with ESG and climate data traceability and methodological transparency. A clearer depiction of how data is sourced, validated, and converted into scenario variables would help address concerns around model governance and auditability.

3. Mapping Scenario Outputs to Risk Taxonomies and Capital Implications

RASB recommends extending the framework to explicitly map scenario outputs (e.g., projected physical or transition losses) to risk types (e.g., credit, market, reputational) and capital or provisioning consequences. This would support integration into ICAAP, risk appetite statements, and financial planning. Currently, Figure 4 ends at the business model impact level, which is helpful but insufficient for comprehensive risk and capital management.

4. Institutionalization Through Risk Accounting

From a RASB perspective, scenario analysis outcomes should be quantified using standardized, auditable metrics — such as Risk Units (RUs) — which can be aggregated across risk categories and organizational levels.

While the framework reflects the “impact assessment” phase, it does not describe how institutions might consistently measure, compare, and report those impacts over time.

Incorporating a standardized risk quantification layer would enhance transparency, comparability, and supervisory oversight.

5. Differentiating Use by Institution Type

We recommend adapting the framework to reflect different levels of institutional maturity and regulatory intensity. For SNCI firms, a simplified CSA framework might omit complex transmission modelling but retain materiality assessments and directional sensitivity analyses. For systemically important institutions, a more data-intensive approach with internal modelling capabilities should be expected. Overlaying a proportionality lens on the existing framework would better support diverse institutions.

In our view, Figure 4 offers a solid foundation for depicting the climate scenario analysis process, but it would be materially strengthened by introducing iterative feedback loops, enhanced data lineage, risk-capital linkages, institutionalized measurement mechanisms, and tiered expectations. RASB supports the continued development of such visual tools as long as they serve both clarity and operational practicality for regulated entities.

Question 6: While respecting the definitions provided in other parts of the regulation, is there any concept/s used in these guidelines that it would be useful to include in an annexed glossary?

Yes. RASB strongly supports the inclusion of a comprehensive glossary of key terms and concepts used throughout the Guidelines. This is essential not only to support interpretability and consistency of implementation across institutions, but also to help bridge gaps in understanding between ESG specialists, risk managers, accountants, and supervisory authorities. Below are specific concepts that we believe warrant glossary inclusion or enhanced definitional clarity:

1. Materiality (ESG-Specific Definition)

The Guidelines frequently refer to "material" ESG risks without providing a structured or multidimensional definition. We suggest defining materiality explicitly in relation to:

• Potential financial impacts on the institution;
• Impacts on stakeholders and the broader economy;
• Horizon over which materiality may manifest (short-, medium-, and long-term);
• Dynamic nature of ESG materiality as affected by evolving policy, social norms, and climate science. This aligns with evolving practices under the CSRD, IFRS S2, and EFRAG guidance.

2. Risk Transmission Channels

Terms such as “physical risk”, “transition risk”, and “liability risk” are used but not defined uniformly across EU supervisory guidance. A glossary should specify how these risks are expected to transmit to traditional risk categories (e.g., credit, operational, market, reputational). Definitions should draw from NGFS, ECB, and BCBS sources for consistency.

3. Exploratory vs. Adverse Scenario

While these terms appear in the Guidelines, they are not well-distinguished in terms of:

• Objectives (e.g., learning vs. stress resilience);
• Underlying assumptions (e.g., plausibility vs. plausibility plus severity);
• Time horizons;
• Output metrics. Definitions should reflect these distinctions to improve methodological coherence and internal alignment within institutions.

4. Climate Resilience Analysis (CRA) and Climate Stress Testing (CST)

Although introduced in the Guidelines, CRA and CST lack detailed definitional contrasts. Their inclusion in the glossary should delineate:

• Temporal focus (short-term CST vs. long-term CRA);
• Quantitative vs. qualitative emphasis;
• Supervisory vs. strategic utility;
• Integration pathways into ICAAP, risk appetite, and strategy.

5. Feedback Loops and Escalation Triggers

The concept of feedback loops between scenario outcomes and internal governance, strategy, or capital planning is used implicitly but should be made explicit and defined. Similarly, “escalation triggers” used in monitoring and control functions should be clearly articulated to ensure consistent risk response practices.

6. Proportionality

Given its centrality to the Guidelines, the term “proportionality” should be defined not only generically but also in terms of how it applies to scenario design, frequency, governance, data expectations, and disclosure obligations.

7. Residual Risk and Mitigation Effectiveness

From a risk accounting perspective, inclusion of terms such as “residual risk,” “inherent risk,” and “mitigation effectiveness” would aid institutions in applying structured ESG risk measurement. These terms are critical to transitioning from qualitative judgment to standardized quantitative assessment frameworks.

This framing helps institutions trace how inherent ESG risks are transformed—via mitigation strategies—into measurable residual exposures within scenario analysis exercises.

In conclusion, a well-structured glossary would support transparency, comparability, and regulatory convergence. RASB recommends drawing on existing taxonomies (e.g., from EFRAG, NGFS, BCBS, and ISSB) and ensuring that definitions are not only technically precise but also practically actionable.

Question 7: Do you have comments on section 4.1 Purpose and governance?

RASB supports the objectives articulated in Section 4.1, particularly the emphasis on embedding ESG scenario analysis within institutions’ governance frameworks. This represents an important evolution from scenario analysis as a purely risk management tool to one that is central to enterprise strategy, oversight, and accountability. That said, there are several areas where Section 4.1 could be strengthened to promote greater operational clarity and alignment with sound governance practices.

1. Board Accountability and Skill Requirements

Section 4.1 outlines the role of the management body but could more clearly specify expectations around ESG competence. We recommend that institutions be required to ensure their boards possess or develop adequate understanding of ESG risks, scenario analysis principles, and emerging supervisory expectations. This includes familiarity with scenario assumptions, model limitations, and implications for capital and strategy. RASB suggests aligning this with guidance under CRD and EBA Fit & Proper Guidelines.

2. Governance of Scenario Methodology and Assumptions

The Guidelines should emphasize the board’s role in approving the methodological framework and material assumptions used in ESG scenarios. RASB proposes that governance bodies review not just results but the methodological integrity of the scenario design, including:

• Risk factor selection;
• Assumptions about ESG transmission channels;
• Use of external data or benchmarks;
• Choice of exploratory vs. adverse scenario formats. This supports model validation and accountability in a domain where significant uncertainty persists.

3. Escalation and Feedback Loops

The Guidelines should clarify that scenario analysis must include formal escalation pathways when outcomes indicate heightened risk exposure or misalignment with the institution’s risk appetite. These should trigger defined governance actions (e.g., strategy reviews, capital reallocation, stakeholder disclosures). Furthermore, feedback loops should be embedded, whereby scenario findings directly influence subsequent scenario iterations, strategic planning, and governance updates.

4. Proportionality in Governance Expectations

While reinforcing governance is critical, the application of expectations should reflect institutional size and complexity. SNCI firms may not require dedicated ESG scenario committees but should still ensure clear accountability and board-level review. The Guidelines could propose tiered governance models that differentiate between small firms, mid-tier institutions, and systemically important banks.

5. Integration into Broader Risk and Control Architecture

Finally, RASB suggests that governance responsibilities be framed within the three lines of defense model. Clear roles should be outlined for:

• Business lines (1st line) in defining relevant risk exposures;
• Risk and finance functions (2nd line) in scenario execution and impact analysis;
• Internal audit (3rd line) in providing independent assurance over governance processes and scenario integrity.

It is our belief that Section 4.1 provides an essential foundation for ESG scenario governance. Its effectiveness would be improved by including clearer expectations for board expertise, methodological oversight, escalation mechanisms, proportional governance models, and alignment with internal control frameworks. These enhancements would support a credible, risk-informed governance culture around ESG scenario analysis.

Question 8: Do you agree that the proposed proportionality approach is commensurate with both the maturity of the topic and the size, nature and complexity of the institution’ s activities?

RASB agrees with the overarching principle of proportionality embedded in the Guidelines and acknowledges the EBA’s effort to balance supervisory expectations with the heterogeneous capabilities and exposures of institutions across the EU. However, we believe the current articulation of the proportionality principle could be strengthened in several important ways to better align with the practical realities of ESG scenario implementation.

1. Clarifying Tiered Expectations with Granularity

The Guidelines refer to proportionality in general terms but stop short of providing tiered guidance that aligns scenario expectations with institution type. RASB recommends the introduction of a formal matrix or decision-tree that outlines differentiated expectations for small, non-complex institutions (SNCI), mid-sized banks, and systemically important firms. This should address:

• Scenario frequency and complexity;
• Governance requirements;
• Data and modelling expectations;
• Integration into ICAAP and strategic planning;
• Disclosure obligations. Providing concrete benchmarks would help avoid under- or over-compliance by institutions uncertain of where they fall on the spectrum.

2. Maturity Considerations Must Be Dynamic and Evidenced

The Guidelines should encourage institutions to periodically reassess their ESG scenario analysis maturity and provide evidence of progression. RASB suggests requiring institutions to document not only how they apply proportionality today, but also how they plan to scale capabilities over time. This enables a structured “comply-and-improve” pathway that aligns with supervisory goals for continuous enhancement.

3. Proportionality Should Not Exclude Quantification

While simpler institutions may apply qualitative scenario approaches, the Guidelines should clarify that proportionality does not preclude risk quantification altogether. Even SNCI firms should be expected to estimate the directional financial impact of material ESG risks. RASB encourages the use of simplified quantification frameworks — such as the Risk Unit model — that allow for standardized risk expression without requiring complex internal modelling.

4. Guardrails Against Minimal Compliance

RASB proposes that the EBA include minimum baseline expectations for all institutions, regardless of size. For instance, all institutions should:

• Identify at least one material ESG risk;
• Conduct a basic scenario analysis linked to that risk;
• Involve governance structures in reviewing outcomes;
• Maintain documentation of scenario design and assumptions. This should prevent misuse of proportionality as a rationale for non-engagement.

5. Supervisory Transparency on Proportional Application

Finally, the EBA should consider publishing anonymized supervisory findings or case studies on how proportionality is applied in practice across institution types. This would promote consistency, learning, and industry alignment. A knowledge-sharing initiative could further support proportional implementation without lowering standards.

Therefore, while the Guidelines adopt a proportionate lens, they would benefit from additional specificity, dynamic improvement expectations, and a commitment to retaining quantitative rigor even at lower complexity levels. RASB supports a practical but disciplined application of proportionality that promotes meaningful scenario practices across the full spectrum of EU institutions.

Question 9: Do you agree with the proposed references to organisations in paragraph 28? Would you suggest alternative or complementary references?

RASB acknowledges the EBA’s reference to several international organizations and frameworks in paragraph 28, such as the Network for Greening the Financial System (NGFS), the International Energy Agency (IEA), and the Intergovernmental Panel on Climate Change (IPCC). These references are appropriate, credible, and well-aligned with scientific and regulatory standards. However, we believe there is room for enhancement to further diversify the sources and to improve alignment with risk quantification and disclosure practices.

1. Expand to Include Standards-Setters in Risk and Accounting

RASB recommends including references to the following organizations, which provide essential methodologies and conceptual tools relevant for scenario analysis and ESG risk measurement:

• EFRAG – for its sustainability reporting standards and materiality frameworks under the CSRD;
• ISSB/IFRS Foundation – for global baseline climate and sustainability-related disclosures;
• BCBS – for supervisory approaches to climate-related financial risks and its ongoing work on Pillar 1 integration;
• FRC (UK) – for guidance on climate-related assumptions in financial statements. These additions would promote greater integration of ESG scenario analysis into financial and risk reporting.

2. Highlight Role of Risk Accounting Standards Board (RASB)

Given its pioneering work on standardized, non-financial risk quantification using Risk Units (RUs), we respectfully propose that the Risk Accounting Standards Board (RASB) be referenced in this context. RASB has developed tools and methodologies for quantifying ESG and operational risks that can enhance the credibility, transparency, and comparability of scenario outcomes. Its publications directly address the challenges raised in these Guidelines, particularly regarding risk transmission, residual risk calculation, and integration with ICAAP.

3. Encourage Reference to Academic and Technical Literature

While international bodies provide essential macro-level guidance, technical design of scenarios also benefits from the scientific and academic literature, including:

• Peer-reviewed methodologies on physical and transition risk modelling;
• Empirical studies on the impacts of ESG risks on financial performance and systemic risk;
• Research on scenario stress test calibration and behavioural assumptions. The Guidelines could encourage institutions to supplement core references with technical insights that improve analytical rigour.

4. Emphasize Dynamic and Iterative Nature of Reference Sources

RASB also suggests the Guidelines clarify that references to these organizations should be revisited periodically as new data, tools, and regulatory expectations emerge. This ensures that scenario analysis remains adaptive and forward-looking, especially in a rapidly evolving ESG landscape.

To conclude, we believe the references in paragraph 28 are appropriate but could be meaningfully expanded to include accounting, supervisory, and technical sources that support the effective implementation of ESG scenario analysis. A broader and more dynamic set of reference points would better equip institutions to align with evolving best practices in ESG risk quantification and management.

Question 10: Do you have additional comments on section 5.1 Setting climate scenarios?

RASB welcomes the EBA’s efforts to guide institutions in the structured design of climate scenarios in section 5.1. This section offers valuable direction on the need for plausibility, relevance, and alignment with climate pathways. However, several aspects of the guidance could be expanded or clarified to enhance its utility, particularly from the standpoint of consistency, comparability, and quantification.

1. Clarify the Role of Standardized vs. Institution-Specific Scenarios

Section 5.1 rightly allows for institution-specific scenario development, but RASB recommends more explicit encouragement of a hybrid approach. Institutions, especially less mature ones, should be guided to adopt at least one standardized baseline or reference scenario (e.g., NGFS Net Zero 2050 or Current Policies) alongside internal scenarios. This facilitates comparability across the sector and supports supervisory benchmarking, without stifling innovation or relevance.

2. Expand on Scenario Selection Criteria and Documentation Expectations

While the section emphasizes plausibility and materiality, the Guidelines should offer more concrete criteria for selecting scenario variables, time horizons, and geographic/regulatory relevance. RASB recommends institutions be required to document:

• Rationale for chosen scenario narratives and variables;
• Key assumptions and uncertainties;
• Adaptations to sector-specific or regional factors;
• Governance procedures used for scenario validation and approval. This enhances transparency, auditability, and model governance.

3. Encourage the Use of Interconnected Risk Pathways

Many ESG risks manifest through complex, nonlinear channels. The Guidelines should encourage scenario designers to incorporate second-order and feedback effects (e.g., a transition policy triggering reputational risk, or physical risk escalating operational losses). RASB suggests institutions use modular scenario templates that map how changes in one risk type (e.g., carbon pricing) propagate to others (e.g., reputational or credit risks) over time, allowing for stress path dependencies.

4. Integration with Financial and Operational Risk Taxonomies

Setting climate scenarios should not occur in isolation. RASB encourages stronger alignment between climate scenario inputs and existing financial risk taxonomies (e.g., credit, market, operational). For instance, climate scenario variables (like carbon taxes or flood exposure) should be directly translatable into financial impact pathways within ICAAP models or internal loss databases.

5. Incorporate Risk Unit (RU)-Based Quantification Where Feasible

To ensure that scenario outputs inform capital planning, institutions should be guided to quantify residual risk exposure using standardized metrics such as RUs. This would improve internal risk monitoring and comparability across firms and also assist supervisors in aggregating sectoral vulnerabilities.

6. Address Data Gaps with Practical Workarounds

RASB supports acknowledging the ongoing data limitations many institutions face. Section 5.1 should suggest practical measures such as proxy indicators, expert elicitation, and scenario triangulation (i.e., testing multiple assumptions for sensitivity analysis) to overcome such gaps without sacrificing rigour.

In summary, Section 5.1 offers a useful platform for climate scenario design but could be materially improved through guidance on standardization, governance, risk taxonomy integration, interconnectivity of risks, and quantitative outputs. These refinements would better position institutions to deliver credible, decision-useful climate risk assessments.

Question 11: Do you have comments on the description of the climate transmission channels?

Yes. RASB commends the EBA for identifying climate risk transmission channels as a core component of effective scenario analysis. The recognition of both physical and transition channels — and their linkage to financial and operational risks — is essential. However, to support clearer implementation and more accurate risk translation, we propose the following refinements:

1. More Granular and Operational Descriptions

While the current channels are conceptually well-defined, institutions would benefit from greater specificity and illustrative examples that show how each transmission channel manifests in concrete terms. For instance:

• Physical risks could be subdivided into chronic (e.g., rising sea levels) and acute (e.g., wildfires, floods) exposures, each with unique data and modelling implications. This distinction matters because each risk profile may require different datasets, scenario construction techniques, and resilience metrics.
• Transition risks could be broken down into regulatory, technological, market, and reputational vectors, which interact differently across industries. Operationalizing these distinctions would help institutions tailor their scenarios more effectively.

2. Stronger Mapping to Traditional Risk Categories

The Guidelines should offer a clearer mapping of climate transmission channels to standard risk types—credit, market, liquidity, operational, and reputational. For example:

• Physical risks → credit risk (asset devaluation), operational risk (disruption of supply chains), insurance risk.
• Transition risks → market risk (carbon pricing), legal risk (liability exposures), strategic risk. Such mappings are critical for embedding climate scenarios into ICAAP and financial reporting.

3. Introduce Feedback Loops and Cascading Effects

Transmission channels often operate through reinforcing loops or compound impacts (e.g., transition risk triggering social unrest → reputational loss → funding cost increase). RASB recommends the Guidelines explicitly acknowledge these non-linear effects and encourage institutions to build scenarios that capture these dynamics.

4. Align with Risk Accounting Principles

RASB proposes that transmission channels also be viewed through the lens of inherent risk, mitigation effectiveness, and residual risk. This facilitates structured assessments that can be expressed in standardized metrics like Risk Units (RUs), enhancing comparability and integration with capital planning.

5. Encourage Sector-Specific Customization

Different industries experience climate transmission channels differently. For example:

• Energy and transport sectors may be highly exposed to policy and technology transition risks.
• Agriculture and real estate may be more exposed to physical climate risks. The Guidelines should prompt institutions to perform sector-level mapping based on material exposures.

6. Expand on Social and Governance Transmission Vectors

Although this section focuses on climate, ESG scenario analysis must also consider how social and governance factors (e.g., labour rights violations, governance failures) transmit into financial outcomes. Future guidance might expand on how similar channel frameworks could be applied across the ESG spectrum.

To summarise, while the existing descriptions of climate transmission channels provide a strong starting point, they would benefit from greater operational depth, structured risk mappings, integration with risk accounting logic, and sector-specific guidance. These enhancements would improve the utility and accuracy of scenario development across the industry.

Question 12: Do you have comments on climate stress test (CST) tool and its use to test an institution’s financial resilience?

Yes. RASB supports the use of Climate Stress Testing (CST) as a vital instrument for assessing an institution’s near- to medium-term financial resilience under plausible adverse climate-related scenarios. The emphasis on financial impact, alignment with risk management, and ICAAP relevance is appropriate. To further strengthen CST’s practical application and supervisory value, we recommend the following improvements:

1. Encourage Quantification with Standardized Units

CST should be used to quantify expected losses under different climate stress assumptions. RASB advocates for the expression of such losses in standardized, auditable units — such as Risk Units (RUs) — to promote consistency, benchmarking, and capital integration as well as corelation with financial reporting. This would help align CST results with Pillar 2 assessments and forward-looking provisioning frameworks.

2. Expand Use of Reverse Stress Testing for Resilience Evaluation

While CST typically involves applying pre-defined shocks, institutions should also be encouraged to conduct reverse stress tests. Reverse CST involves defining a critical failure threshold (e.g., capital adequacy breach or liquidity stress) and working backward to identify the climate-related conditions or drivers that could cause such outcomes. These help identify the tipping points or vulnerabilities that could compromise financial resilience. The Guidelines should highlight reverse CST as a complementary tool for identifying capital shortfalls, governance gaps, or systemic exposures.

3. Integration into Capital Planning and Risk Appetite

CST results should have a clear and traceable impact on capital allocation decisions, internal risk appetite calibration, and strategic risk mitigation plans. RASB proposes including examples or templates showing how CST outputs can be translated into ICAAP adjustments or risk tolerance thresholds, fostering better alignment with business planning and supervisory review expectations.

4. Balance Between Supervisory and Institution-Led Scenarios

While supervisory scenarios (e.g., from NGFS or national authorities) offer comparability, CST should retain space for institution-led scenario design. The Guidelines could clarify the balance expected between standardized and bespoke stress scenarios, based on the institution’s business model, ESG exposure, and scenario maturity.

5. Encourage Data Traceability and Model Governance

Institutions often use complex models or vendor solutions in CST. The Guidelines should reinforce expectations for model validation, assumption traceability, and auditability. This includes documenting data sources, scenario pathways, and how results inform capital metrics. Model governance should also account for climate data uncertainties and disclosure alignment (e.g., CSRD, IFRS S2).

6. Link CST to Risk Control Adjustments

Beyond financial impact assessment, CST should feed back into control enhancements — such as adjusted lending criteria, revised underwriting standards, or new ESG-linked risk limits. The Guidelines should encourage institutions to close the loop between scenario outcomes and operational risk management actions.

We consider CST as a crucial tool for evaluating climate-driven financial risk. RASB encourages the EBA to further institutionalize its outputs within capital planning, accounting integration, and risk control enhancements — supported by standardized metrics, robust model governance, and traceable scenario processes.

Question 13: Do you have comments on the Climate Resilience Analysis (CRA) tool and its use to challenge an institution’s business model resilience?

Yes. RASB supports the use of Climate Resilience Analysis (CRA) as a forward-looking strategic tool to test the long-term viability and adaptability of an institution’s business model under evolving climate conditions. This function complements the CST and broadens the scope of ESG scenario analysis beyond short-term financial metrics. To enhance the effectiveness of CRA, we suggest the following improvements:

1. Clarify Objectives and Outputs of CRA

CRA’s intended purpose — as a tool for evaluating business model alignment with future climate and policy environments — should be more clearly distinguished from CST. The Guidelines should emphasize that CRA outputs should inform:

• Strategic risk reviews;
• Product development and client segmentation;
• Portfolio alignment with transition pathways (e.g., 1.5°C goals);
• Long-term capital allocation and balance sheet structure. This clarity will ensure that CRA receives appropriate governance attention and is not mistakenly treated as a variant of CST.

2. Link CRA Results to Strategic Planning and Governance Reviews

CRA should feed directly into strategic decision-making and governance oversight. RASB recommends specifying mechanisms for:

• Using CRA results to assess business model sustainability;
• Identifying climate-related inflection points (e.g., stranded assets, carbon lock-in);
• Triggering reviews of product mix, regional exposure, and funding strategies. Embedding CRA into enterprise-level strategy cycles will elevate its relevance.

3. Promote Consistency with External Disclosure Frameworks

The long-term nature of CRA aligns closely with external disclosure frameworks such as the CSRD, IFRS S2, and climate transition plan expectations under the EU Taxonomy. The Guidelines should encourage institutions to use CRA outputs as a foundation for those disclosures, promoting coherence between internal resilience assessments and public transparency.

4. Highlight Methodologies for Transition Alignment and Scenario Narratives

While financial metrics may be less central in CRA than CST, the Guidelines should still guide institutions on:

• Defining and selecting transition scenarios (e.g., disorderly, delayed, or orderly transitions);
• Mapping narrative assumptions (e.g., carbon pricing, policy shifts) to strategic planning variables;
• Translating outcomes into decision-useful strategic options. RASB suggests offering illustrative examples of how CRA could inform asset-liability management, client engagement strategies, or organizational transformation.

5. Encourage Use of Forward Metrics and Qualitative Risk Indicators

In addition to quantitative indicators, CRA should support qualitative assessments such as:

• Reputation risk trends;
• Regulatory adaptation capacity;
• Organizational learning and climate governance resilience. These forward-looking indicators support more holistic resilience evaluations and can be incorporated into strategic performance metrics or ESG-adjusted risk indicators aligned with broader risk accounting practices.

6. Recommend Board-Level Oversight and Challenge

Given CRA’s implications for long-term sustainability and stakeholder trust, the Guidelines should require or strongly recommend board-level review and challenge of CRA findings. Institutions should be able to demonstrate that strategic pivots or scenario-driven innovations have been discussed and endorsed at senior governance levels.

In our view, CRA represents a powerful, underutilized lens through which institutions can future-proof their business models. RASB encourages the EBA to enhance the clarity, governance alignment, and methodological depth of CRA guidance to ensure that it serves as a catalyst for meaningful, forward-looking strategy and change.

Question 14: Do you have any additional comments on the draft Guidelines on ESG Scenario Analysis?

Yes. RASB commends the EBA for taking an important step forward in defining principles-based expectations for ESG scenario analysis. The draft Guidelines represent a vital evolution in supervisory thinking, particularly in supporting forward-looking assessments of ESG risk, climate strategy alignment, and institutional resilience. In addition to the specific points addressed in earlier responses, we offer the following overarching recommendations to further enhance the Guidelines:

1. Promote Integration of ESG and Risk Management Frameworks

While the Guidelines successfully establish ESG scenario analysis as a core process, more can be done to show how these analyses intersect with financial and operational risk management. We suggest adding illustrative case studies or implementation pathways that link ESG scenario results to:

• ICAAP and ILAAP outputs;
• Risk appetite recalibration;
• Strategic business model reviews;
• Operational risk and controls adjustment. This will help institutions embed ESG within enterprise-wide risk and capital planning frameworks.

2. Institutionalize Quantification Using Risk Accounting Concepts

As previously stated, RASB advocates for standardization in risk quantification using accounting-based measures such as Risk Units (RUs). Embedding a risk accounting lens would:

• Allow comparability across institutions;
• Translate ESG risks, together with other non-financial risks, into financial implications for decision-making;
• Support the transition from a qualitative to a quantitative risk culture;
• Bridge the gap between sustainability functions and finance. RASB recommends the EBA reference or encourage such methodologies in supervisory expectations.

3. Strengthen Scenario Governance and Model Validation Expectations

Robust governance is key to credible scenario analysis. The Guidelines could better articulate expectations for:

• Ownership and accountability for scenario design;
• Independent model validation and challenge functions;
• Auditability of assumptions, data sources, and impact outputs. These governance elements are especially critical where scenario analysis supports Pillar 2 capital adequacy or strategic planning.

4. Build Alignment with Evolving Regulatory Frameworks

The Guidelines should maintain coherence with related EU and global initiatives, including:

• CSRD and ESRS (for sustainability disclosures);
• IFRS S2 (climate-related financial disclosures);
• Basel Committee and ECB guidance on climate-related financial risks;
• EU Taxonomy and Green Asset Ratio frameworks. RASB recommends a dynamic alignment statement acknowledging that scenario expectations will evolve in parallel with these initiatives.

5. Encourage Knowledge-Sharing and Industry Collaboration

Given the evolving maturity of ESG scenario practices, the EBA could foster more industry-wide collaboration through:

• Scenario benchmarking surveys;
• Data consortiums for hard-to-model ESG risks;
• Voluntary working groups to co-develop metrics and methodologies. This would foster convergence and accelerate institutional learning.

6. Establish Implementation Monitoring and Phased Expectations

RASB encourages the EBA to outline a supervisory roadmap or phased implementation model. This could include indicative milestones with suggested timelines, for example:

• Year 1: Establishment of governance structures;
• Year 2: Completion of qualitative scenario analysis pilot;
• Year 3: Introduction of quantification frameworks;
• Year 4: Integration into ICAAP and voluntary public disclosures.

This structured approach would reduce compliance uncertainty and support institutions in progressing toward full alignment.

Upload files

Name of the organization