European Banking Authority (EBA), the EU banking supervisor, has released the final Guideline on the management of ESG risks. The guidelines address requirements for ESG risk management and internal processes arrangements that banks and financial institutions should have in place. 

Private market firms, asset managers, and impact investors should carefully consider the finalized guidelines for ESG risk management, as they will require financial institutions to conduct regular materiality assessments and develop transition plans aligning with the climate neutrality objectives of the EU. 

Let's explore the final report for the Guideline on the management of ESG risks in detail. 

About the guidelines for the management of ESG risk

The guidelines for the management of ESG risk is a set of rules or a framework that requires institutions to identify, measure, manage, and monitor ESG risks in detail. Initially, the consultation for the guidelines was introduced in early 2024. After a year the EBA has published its final report in order to manage ESG risks better and maintain operational resilience. With these guidelines specifying precise requirements for financial institutions to put in place strong governance frameworks and internal procedures., the EU can move toward carbon neutrality by 2050.

Key aspects of final guidelines by EBA

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  The guidelines have been created to fulfill the mandate outlined in paragraphs (a), (b), and (c) of Article 87a(5) of the Capital Requirements Directive VI (CRD VI) in accordance with the EBA's sustainable finance strategy. 

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  According to the final report, financial institutions must integrate ESG risks into their overall risk management frameworks, including market, credit, operational, reputational, and liquidity risks. In addition, they must develop internal procedures that include tools and methodologies to identify ESG risk drivers.

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  With risk management, the concerned entities are required to conduct materiality assessments to evaluate risk impact, and assessments should cover short-, medium--, and long-term risks with a perspective extending at least 10 years. 

Compliance with the guidelines for the management of ESG risk

The final guidelines were released specifically targeting the banks in relation to ESG risk management. However, they also apply to all the other financial institutions as defined under the Capital Requirements Regulation. 

The application of these guidelines will take effect for most banks and financial institutions from January 11, 2026. For small and non-complex institutions, it will be applicable till January 11 11, 2027, for compliance. 

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