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?

The interplay between these Guidelines and the Guidelines on the management of ESG risks is well-articulated, with the former serving as a complementary framework focused specifically on scenario analysis. The draft Guidelines appropriately reference the broader ESG risk management framework, ensuring consistency in materiality assessments, governance, and proportionality. However, to enhance clarity, these guidelines could explicitly outline how the outputs of scenario analysis (e.g., CST/CRA results) should feed into the institution’s overall ESG risk management processes, such as risk mitigation strategies or capital allocation decisions under the ICAAP/ILAAP. This would reinforce the iterative relationship between scenario analysis and risk management practices and would also avoid potential overlaps or gaps in application.

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

The proposed definition of scenario analysis, aligned with the TCFD’s description as a process for identifying and assessing plausible future states under uncertainty, is robust and appropriately forward-looking. It effectively captures the tool’s purpose of exploring potential implications rather than predicting precise outcomes, which is critical given the evolving nature of ESG risks. The various uses outlined in Figure 1—ranging from identifying risks and opportunities to supporting strategic planning and raising awareness—are comprehensive and reflect the multifaceted role of scenario analysis in banking. However, the figure could benefit from explicitly highlighting how these uses interconnect (e.g., how risk identification informs strategic planning) to emphasize a holistic approach. Additionally, while the qualitative-to-quantitative spectrum is implied, a clearer acknowledgment of this progression in the definition could enhance its applicability for institutions at different maturity levels. Overall, the definition and uses are well-conceived but could be refined for greater operational clarity.

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?

The distinction between short-term Climate Stress Testing (CST) and longer-term Climate Resilience Analysis (CRA) in Figure 3 is both logical and practical, effectively addressing the dual needs of financial resilience (up to 5 years) and business model resilience (beyond 10 years). The CST’s focus on capital and liquidity adequacy under adverse but plausible scenarios aligns well with existing stress-testing frameworks, while the CRA’s emphasis on long-term strategic robustness under deep uncertainty fills a critical gap in assessing ESG impacts. The differentiation in time horizons and methodologies (static/dynamic balance sheets, quantitative/qualitative outputs) is appropriate given the distinct objectives. However, the transition between these horizons could be better articulated—e.g., how CST results might inform CRA assumptions—to ensure continuity and avoid silos. Additionally, the 5-year CST cutoff might be restrictive for some climate risks with intermediate impacts (e.g., 5–10 years), suggesting a potential need for flexibility in defining “short-term.” Overall, the distinction is sound but could be enhanced with guidance on bridging the two analyses.

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

The interplay between these Guidelines on ESG Scenario Analysis and the Guidelines on institutions’ stress testing (EBA/GL/2018/04) is effectively designed to integrate ESG factors into established stress testing frameworks. These Guidelines build on the earlier framework by specifying how climate and ESG risks should be incorporated into stress testing programs, particularly through the CST, while maintaining consistency with existing methodologies (e.g., section 4.7.1 for IRB credit risk). The reference to ICAAP/ILAAP processes ensures alignment with prudential requirements. However, the interplay could be strengthened by explicitly addressing how ESG-specific challenges—like limited historical data or non-linear risk drivers—might necessitate deviations from traditional stress testing assumptions (e.g., backtesting limitations noted in paragraph 65). Additionally, more guidance on reconciling the qualitative nature of CRA with the quantitative focus of the 2018 Guidelines would enhance coherence, especially for long-term resilience testing. The relationship is robust but could benefit from clearer integration of ESG-specific adaptations.

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

The Climate Scenario Analysis (CSA) framework in Figure 4 provides a clear, structured approach to integrating climate risks into institutional processes, effectively delineating steps from objective-setting to result utilization. The dual focus on CST (financial resilience) and CRA (business model resilience) within the framework is well-balanced, and the sequential steps—defining scope, setting scenarios, identifying transmission channels, collecting data, assessing impacts, and using results—are logical and comprehensive. The emphasis on materiality and proportionality in scoping is particularly useful for practical implementation. However, the framework could be enhanced by explicitly addressing iterative feedback loops (e.g., how results refine scenarios or data collection) to reflect the evolving nature of ESG risks. For example, if initial CRA results indicate unexpected vulnerability in a specific sector (e.g., agriculture under a delayed-transition scenario), this could trigger refinement of transition assumptions or prompt targeted data collection on regional water stress or crop yield sensitivity. Additionally, while transmission channels are a key step, Figure 4 could visually link them more clearly to financial and strategic outcomes to underscore their role. Overall, the framework is robust but could benefit from minor refinements for dynamism and clarity.

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?

The Guidelines effectively leverage definitions from existing regulations (e.g., Directive 2013/36/EU, Regulation (EU) 575/2013, and prior EBA Guidelines), ensuring consistency. However, several concepts unique to or emphasized in these Guidelines could benefit from inclusion in an annexed glossary to enhance clarity for users, especially given the nascent nature of ESG scenario analysis. Suggested terms include:

1. Climate Stress Test (CST): Defined as a short-term (up to 5 years) analysis to assess financial resilience, its specific meaning here warrants clarification beyond general stress testing.

2. Climate Resilience Analysis (CRA): A long-term (10+ years) tool for business model resilience, distinct from CST, merits a standalone definition.

3. Transmission Channels: Frequently referenced (e.g., paragraphs 47–48), a precise definition of how climate risks translate into financial risks would aid consistency.

4. Central Scenario: Used in CRA (paragraph 40), its distinction from a baseline scenario in CST could be clarified.

5. Materiality Assessment: While referenced to the ESG risk Guidelines, a concise definition tailored to scenario analysis would reinforce its role.

6. Transition risks: Risks that arise from the process of adjusting towards a low-carbon economy.

7. Physical risks: Risks arising from the physical effects of climate change, such as extreme weather events.

These additions would streamline interpretation without duplicating existing regulatory definitions.

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

Section 4.1 on Purpose and Governance provides a solid foundation for embedding ESG scenario analysis within institutions’ risk management and strategic frameworks. The dual purpose—testing resilience (financial and business model) and informing strategy via a credible narrative—is articulated and aligns with the Guidelines’ objectives. The emphasis on governance, including senior management endorsement (paragraph 15) and cross-functional collaboration (paragraph 18), is critical for ensuring practical adoption and consistency across the institution. The call for documentation within ICAAP/ILAAP (paragraph 19) further strengthens accountability. However, the section could be enhanced by specifying how scenario analysis outcomes should influence risk appetite statements or strategic decisions, bridging the gap between analysis and action. Additionally, while the narrative’s role is well-defined, guidance on updating it in response to emerging ESG trends (beyond “significant changes” in paragraph 17) could improve adaptability. Overall, the section is robust but could benefit from sharper links to decision-making processes.

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?

Yes, the proposed proportionality approach (section 4.2) is well-calibrated to both the maturity of ESG scenario analysis and the size, nature, and complexity of institutions’ activities. By tying the sophistication of analyses to materiality assessments (paragraph 21) and allowing a phased progression from qualitative to quantitative methods (paragraph 22), the Guidelines accommodate the nascent state of ESG risk modeling and data availability. The flexibility for Small and Non-Complex Institutions (SNCI) to rely initially on qualitative approaches (paragraph 26) appropriately balances resource constraints with the need to address material risks, such as sectoral or geographic ESG exposures (paragraph 31). The iterative learning curve (paragraph 23) further supports institutions as they build capabilities over time. However, to fully ensure commensurability, the Guidelines could provide more concrete examples of “simplified” analyses for SNCI to avoid ambiguity in implementation. Overall, the approach strikes an effective balance, fostering gradual adoption while maintaining rigor where risks are significant.

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

The proposed references to organizations in paragraph 28—Network for Greening the Financial System (NGFS), EU Joint Research Center (JRC), and national government bodies—are appropriate and robust. These entities are widely recognized for their credible, science-based climate scenarios, aligning with Article 87a(3) of Directive 2013/36/EU and ensuring a strong foundation for institutions’ analyses. The NGFS offers comprehensive global scenarios, the JRC provides EU-specific insights, and national bodies add localized relevance, collectively supporting tailored yet consistent scenario development. 

However, complementary references could enhance flexibility and coverage:

• International Energy Agency (IEA): As already mentioned elsewhere (paragraph 15), its inclusion here would reinforce its value for energy transition assumptions, despite noted limitations (footnote 9).
• Intergovernmental Panel on Climate Change (IPCC): As a primary source of climate science (noted in footnote 4), it could provide authoritative baselines for physical risk scenarios.
• Task Force on Climate-related Financial Disclosures (TCFD): Given its influence on the definition of scenario analysis (paragraph 10), referencing its scenario guidance could align with industry practices.
• International bodies (e.g., United Nations, World Bank): "International bodies like the United Nations and the World Bank provide valuable global perspectives and data on sustainable development and related risks, which can inform the development of robust ESG scenario analysis."
• European Union agencies (e.g., European Environment Agency): "European Union agencies such as the European Environment Agency offer key insights and data on environmental trends and policies within the EU, crucial for assessing region-specific ESG risks."
• National regulatory authorities: "National regulatory authorities play a vital role in setting supervisory expectations and providing guidance on ESG risk management, ensuring that institutions align their scenario analysis with local requirements.

These additions would broaden the resource pool without undermining the proposed trio’s suitability, offering institutions more options to customize scenarios to their specific risk profiles.

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

Section 5.1 on setting Climate Scenarios provides a comprehensive and actionable framework for institutions to develop relevant climate scenarios. The inclusion of intertwined factors—socioeconomic context, technological evolution, climate policies, energy systems, consumer preferences, sectoral pathways, and emissions impacts (paragraph 27)—ensures a holistic approach, while the guidance to customize scenarios based on portfolio risks (paragraph 30) enhances applicability. The distinction between baseline/adverse scenarios for CST and central/alternative scenarios for CRA (paragraphs 38–40) is well-defined and purpose-driven. The emphasis on consistency between physical and transition risks over time (paragraph 32) is particularly insightful, recognizing their interdependence.

The section could clarify how institutions should prioritize the factors in paragraph 27 when data or modeling capacity is limited, especially for smaller entities under proportionality (paragraph 37).

While external scenarios (e.g., NGFS, JRC) are recommended, more guidance on validating or adjusting these for institution-specific contexts (e.g., beyond materiality in paragraph 31) would strengthen practical implementation.

The call for internal consistency (paragraph 41) is critical, but examples of common inconsistencies (e.g., mismatched policy and emissions assumptions) could aid execution.

Overall, the section is thorough and well-structured, with minor enhancements possible for prioritization and validation clarity.

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

The description of climate transmission channels in section 5.2 (paragraphs 43–54) is detailed and well-constructed, effectively capturing the pathways through which climate risks impact financial institutions. The breakdown into microeconomic and macroeconomic channels for both transition (paragraph 47) and physical risks (paragraph 48) is comprehensive, covering key drivers like counterparty profitability, asset impairment, economic shocks, and supply chain disruptions. The inclusion of indirect effects (e.g., value chain spillovers in paragraph 49) and mitigation/amplification factors (e.g., insurance, adaptation plans in paragraph 51) adds depth, while the translation into traditional financial risks (paragraph 52) ensures relevance to existing frameworks.

Comments:

• The list of channels is robust, but it could benefit from prioritizing or weighting them based on typical materiality (e.g., credit risk from counterparty defaults often dominates), aiding institutions with limited resources.
• The guidance to monitor international organizations (paragraph 54) is useful, but specifying key sources (e.g., NGFS, IPCC) would align it with section 5.1 and enhance practicality.
• The interplay between transition and physical risk channels could be further emphasized (e.g., how delayed transitions amplify physical risks), building on paragraph 32’s consistency point.
• Overall, the description is thorough and actionable, with minor refinements possible for prioritization and cross-linkages.

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

The Climate Stress Test (CST) tool outlined in section 6.1 (paragraphs 55–68) is a well-designed mechanism for testing institutions’ financial resilience against climate risks in the short to medium term (up to 5 years). Its alignment with the EBA Guidelines on institutions’ stress testing and ICAAP/ILAAP frameworks (paragraph 55) ensures consistency, while the focus on severe but plausible scenarios (paragraph 56) and key outputs like implied losses and capital/liquidity requirements (paragraph 67) tie it directly to prudential objectives. The phased integration approach (paragraph 58) and use of expert judgment to address data gaps (paragraph 65) are pragmatic, given climate risk modeling challenges.

Comments:

• The flexibility to use static or dynamic balance sheets (paragraph 61) is practical, but guidance on when to prefer one over the other (e.g., dynamic for significant portfolio shifts) would enhance decision-making.
• The call for sector/country granularity (paragraph 59) is apt, but examples of climate-sensitive variables (e.g., carbon taxes, flood risk indices) could improve implementation clarity.
• The acknowledgment of backtesting limitations (paragraph 65) is realistic, yet more direction on alternative validation methods (e.g., peer benchmarks) could strengthen robustness.

Overall, the CST tool is robust and well-integrated into existing frameworks, with minor adjustments possible for specificity and validation support. 

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

The Climate Resilience Analysis (CRA) tool in section 6.2 (paragraphs 69–82) is a forward-thinking and effective approach for challenging institutions’ business model resilience over a long-term horizon (10+ years). Its reliance on a detailed environmental analysis tied to an institution-specific narrative (paragraph 69) and dynamic balance sheet projections (paragraph 73) ensures a strategic focus, while the use of a central scenario with alternative scenarios (paragraph 76) robustly tests adaptability under deep uncertainty. The integration with transition plans under EU directives (paragraph 75) aligns it with sustainability goals, and the qualitative output (paragraph 79) suits the long-term, uncertain nature of ESG risks.

Comments:

• The emphasis on mapping business model features (paragraph 71) is strong, but guidance on prioritizing key dependencies (e.g., sector exposure vs. funding structure) could sharpen focus for resource-constrained institutions.
• The suggestion to consider feedback loops and capital reallocation (paragraph 70) is insightful, yet practical examples (e.g., crowding-out in fossil fuel sectors) would aid application.
• The recommendation to avoid over-focusing on middle-range scenarios (paragraph 79) is prudent, but additional advice on weighting extreme scenarios (e.g., 1.5°C vs. high-emission paths) could refine decision-making.

Overall, the CRA tool is well-conceived for long-term resilience testing, with minor enhancements possible for prioritization and practical illustration.

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

The draft Guidelines on ESG Scenario Analysis represent a robust, well-structured, and forward-looking framework that effectively supports the integration of ESG risks—particularly climate-related physical and transition risks—into the strategic and risk management processes of financial institutions. The guidelines’ bifurcation into Climate Stress Testing (CST) and Climate Resilience Analysis (CRA), their alignment with the existing EBA frameworks (e.g., on stress testing and ESG risk management), and their phased implementation (2026 for most institutions; 2027 for Small and Non-Complex Institutions) reflect both ambition and realism in addressing current industry readiness.

Key Strengths:

• Strategic Orientation through CRA: The CRA is a valuable addition that promotes long-term business model viability under varied climate pathways. To enhance practical utility, the guidelines could further detail how CRA outcomes should inform concrete strategic actions—such as sectoral reallocation, client engagement strategies, or divestment planning—thus bridging the gap between scenario analysis and execution.
• Proportionality and Iterative Learning: The principle of proportionality is well-articulated, recognizing varying institutional maturities and resources. The iterative learning approach reinforces a pragmatic trajectory for implementation and encourages gradual capacity-building.
• Scenario Flexibility and Materiality Focus: The emphasis on developing institution-specific narratives rooted in materiality assessments enhances relevance. Moreover, encouraging the use of internationally recognized baselines (e.g., NGFS, IEA) alongside internal scenarios could further foster comparability across the sector.

Opportunities for Enhancement:

• Business Model Integration and KPIs: The Guidelines could recommend a closer integration of scenario analysis results into governance and performance management mechanisms, such as board-level KPIs and remuneration structures. This would embed ESG risks more deeply into institutional culture and decision-making.
• Clarity on Expansion Beyond Climate: While the current climate-first focus is pragmatic (per paragraph 47), establishing a clearer roadmap or indicative timeline for incorporating other ESG risks (e.g., biodiversity loss, social inequalities, governance failures) would support alignment with emerging frameworks like TNFD and OECD guidelines, and ensure long-term relevance.
• Data and Technology Guidance: Although the Guidelines acknowledge data limitations and promote the use of expert judgment (e.g., paragraph 65), further guidance on leveraging emerging technologies (e.g., AI for ESG data aggregation and scenario modeling) and forming partnerships with external providers could significantly strengthen institutions' analytical capabilities.
• Stakeholder Engagement Scope: While the call for internal cross-functional collaboration (paragraph 18) is welcomed, a more explicit reference to external engagement—with stakeholders such as counterparties, regulators, and civil society—could enhance the credibility, relevance, and systemic alignment of scenario narratives and assumptions

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