Agefi Luxembourg - novembre 2025

Novembre 2025 11 AGEFI Luxembourg Économie ESG Risk Management: is your strategy adjusted for upcoming regulatory changes? A s ESG risks move to the forefront of financial reg- ulation, European banks and investors face growing pres- sure to integrate environmental, social, and governance (ESG) considerations into their risk management and strategies. The regulatory landscape is shifting fast, and European Banking Authority’s (EBA) new guidelines are setting the tone for what’s next. Introduction and regulatory overview In January 2025, the EBA published its guidelines on ESG Risk Manage- ment, (1) under Article 87a(5) of Capital Requirements Directive VI (CRD VI) and aligned with Capital Require- ments Regulation III (CRR III). These guidelines mark a turning point, re- quiring banks to identify, measure, manage, and monitor ESG risks through robust internal processes and against a multi-year transition plan to- wards the 2030 carbon emission re- duction and 2050 net-zero EU objectives. Their goal is to ensure the financial system’s long-term resilience and support the EU’s transition to a sustainable economy. It bears no repeating, but we will say it anyway: ESG risks can have mate- rial financial impacts on banks’ port- folios, operations, and reputation. Their systemic nature and potential to trigger cascading financial losses make them central to prudential su- pervision and long-term financial sta- bility. Environmental risks include both physical risks (e.g., floods, wild- fires) and transition risks (e.g., policy shifts, stranded assets). Social and governance risks, such as labor prac- tices, human rights, and board over- sight, are increasingly relevant and expected to evolve toward quantifi- able metrics. Findings from the EU Fit-for-55 cli- mate scenario analysis with the in- volvement of the European Systemic Risk Board (ESRB), the European Banking Authority (EBA), the Euro- pean Insurance and Occupational PensionsAuthority (EIOPA), the Euro- pean Securities andMarketsAuthority (ESMA) and the European Central Bank (ECB) (2) highlight the financial relevance of ESG risks, especially cli- mate-related ones. Probabilities of de- fault (PDs) are identified as a key risk factor, with projected increases rang- ing from 0.6% in optimistic scenarios to 2.3% in worst-case scenarios, un- derscoring the potential for significant credit risk amplification. Complementing this, research from the Bank for International Settlements (BIS) (3) shows how physical risks can affect borrower solvency and increase default correlations across loan port- folios. These risks, once considered marginal, are now seen as systemic, requiring integration into banks’ cap- ital planning, loan pricing, and provi- sioning strategies. Yet, according to EY’s Climate Action Barometer, (4) while 67% of companies conduct climate scenario analysis, only 36% reflect climate-related finan- cial impacts in their financial state- ments, and just 19% have adopted plans to mitigate physical climate risks, despite widespread awareness. Building on this regulatory and risk context, the EBA Guidelines will apply to all credit institutions, with differentiated expectations based on size and complexity. They will be- come enforceable by January 2026 for most banks, and by January 2027 for small and non-complex entities. In May 2025, Luxembourg’s supervisory authority, the Commission de Surveil- lance du Secteur Financier (CSSF), con- firmed its intention to comply with the EBA Guidelines and is currently evaluating whether to amend its exist- ing ESG risk circular or to adopt the guidelines directly into its supervisory framework. The Guidelines are designed to be interoperable with other regulatory frameworks, notably the Corporate Sustainability Reporting Directive, Corporate SustainabilityDue Diligence Directive and CRD/CRR frameworks. This alignment reduces duplication, streamlines reporting, and enhances comparability across institutions. With hundreds of EU banks falling within the scope of the Guidelines, it is increasingly urgent for institutions to embed ESG risks into enterprise risk management frameworks. Materiality assessment: Embedding ESGacross risk categories Under the new EBA framework, banks should embed ESG risks across all traditional risk categories, includ- ing credit, market, operational, liquid- ity, business and reputational risks. To ensure that ESG risk management is proportionate and focused on the most relevant risks for the institution, this requires regular materiality as- sessments to determine which ESG risks are most significant to their busi- ness models and risk profiles. These resemble other materiality as- sessments carried out through Direc- tive 2013/34/EU and Commission Delegated Regulation (EU) 2023/2772 and were already present in supervi- sory guidance provided by the Net- work of Central Banks and Supervisors for Greening the Financial System (NGFS), European Central Bank (ECB) and the CSSF. The EBA however provides further guidance relating to the scope of the materiality assessment, including the minimum physical and transition risks to be included and a list of rec- ommended key metrics. Large institu- tions should reassess materiality on an annual basis, conducting additional materiality assessments if external fac- tors and internal exposures drastically evolve. This iterative approach en- sures that ESG considerations are not siloed but integrated into the core of risk management. Identification and measurement of ESG risks After completing the materiality as- sessment, the EBA Guidelines require banks to establish robust processes for measuring and managing ESG risks. This includes the quantification of cli- mate-related and other environmental risks through methodologies such as scenario analysis, stress testing, and portfolio impact modeling. Impor- tantly, according to the Bank for Inter- national Settlements (BIS) studies, banks should begin to incorporate these risks into their credit risk mod- elling frameworks. This integration is essential to ensure that climate risks are adequately re- flected in capital planning and risk ap- petite. In parallel, banks should also identify and evaluate social and gov- ernance risks, which may initially rely on qualitative assessments. These di- mensions, such as human rights, labor practices, board structure, and con- duct, are expected to evolve toward quantitative measurement as method- ologies and data availability mature. Management and monitoring: Integration into risk appetite and governance Beyond risk measurement, ESG risks need to be fully integrated into banks’ risk appetite frameworks, governance structures, and decision-making pro- cesses. This involves embedding ESG considerations into internal reporting, board oversight, and day-to-day management. Furthermore, assessment processes such as the Internal Capital Adequacy Assessment Process (ICAAP) and In- ternal Liquidity Adequacy Assess- ment Process (ILAAP) need to explicitly reflect ESG risks when as- sessing capital and liquidity needs. This holistic approach ensures that ESG risks influence strategic choices and are monitored continuously across the institution. Transitionplanning: Forward-looking scenario analysis At the core of the EBA Guidelines is the development and implementation of a forward-looking transition plan. Financial institutions will be expected to conduct scenario analyses, such as exploring various climate pathways (e.g., best-case, worst-case), to assess the long-term impact of ESG risks over a horizon of at least 10 years. These exercises help institutions to as- sess the financial and operational im- plications of transition pathways relevant for their business model and prepare for potential regulatory changes, shifts in market expectations, and evolving stakeholder demands. The EBAGuidelines set clear expecta- tions for the content, governance and follow-up of transition plans, whereby effective implementation across the three lines of defense will likely im- pose a transformational journey to most institutions. Building on this framework, the newly published EBA Guidelines on environmental scenario analysis (re- leased on November 5th and effective from January 2027) provide more de- tailed instructions on how banks and financial institutions should approach these exercises, with a specific focus on environmental risks. The guide- lines introduce a clear distinction be- tween short-term stress testing (up to five years, aimed at assessing finan- cial resilience to severe shocks) and long-term resilience analysis, which looks at least ten years ahead to chal- lenge the sustainability of the business model in the face of environmental change. Institutions are expected to base their analyses on credible scenar- ios developed by international organi- zations such as the IPCC, NGFS, or IEA, while also adapting these scenar- ios to their own specific context and exposures. A key principle introduced is propor- tionality: the depth and complexity of scenario analysis should be tailored to the institution’s size, business model, and the materiality of environmental risks. For smaller institutions or those less exposed, simplified approaches such as sensitivity analysis are encour- aged, allowing for a rapid assessment of how changes in key risk factors could impact the institution without the need for complex models. Beyond compliance, financial re- silience to ESG risks and business model viability, transition planning offers a strategic opportunity for banks. As younger generations in- creasingly prioritize sustainability, in- stitutions should respond by offering green financial instruments such as green bonds, sustainability-linked loans, and ESG-aligned investment products. These tools support decar- bonization while meeting evolving client expectations and values . Banks are also expected to play an ac- tive role in accompanying clients and sectors through the transition, partic- ularly those in hard-to-abate indus- tries such as energy, transport, and heavy manufacturing. By aligning fi- nancial products with credible transi- tion pathways, financial institutions can help mitigate risk while unlocking new growth opportunities in sustain- able finance. A robust transition plan, therefore, is not just a regulatory re- quirement, but instead a lever for strategic positioning, client engage- ment, and long-term value creation. Next steps: How to be prepared for the ESG risk shift The guidelines mark a turning point for European banks, demanding a strategic shift toward long-term re- silience in a fast-changing financial landscape. Firstly, institutions should identify and quantify ESG risks using forward- looking models to assess their finan- cial materiality across all risk categories. Secondly, ESG risks should be embedded into ICAAP and ILAAP, aligned with business strategy, and supported by scenario analysis. Tran- sition plans should be measurable, regularly updated, and tailored to each institution’s exposures. Thirdly, banks are required to estab- lish day-to-day management of ESG risks, with clear roles across risk, com- pliance, internal audit and senior man- agement. Internal processes should be aligned with external disclosures, and support board-level oversight. Lastly, building internal capacity is essential. Training compliance, risk and executive teams on ESG risks, transition planning, and regulatory expectations is key to effective imple- mentation. As ESG risks become central to pru- dential supervision, those institutions that act early (and adapt continu- ously) will meet regulatory expecta- tions and strengthen their resilience, enhancing stakeholder trust, and un- locking new opportunities in sustain- able finance. Vanessa MÜLLER, EY Luxembourg Partner, ESG Leader Anna ILLARIONOVA, EY Luxembourg Senior Manager, ESG Services Vincent GALAND, EY Luxembourg Partner, Risk 1)Guidelinesonthemanagementofenvironmental,social andgovernance(ESG)risks 2)Fit-for-55climatescenarioanalysis–BytheEuropean SupervisoryAuthoritiesandtheEuropeanCentralBank 3) BISWorking Papers - Incorporating physical climate risks intobanks’creditriskmodels 4)ClimateAction–EYBarometerSurvey2024 EXPLORING BUSINESS HORIZONS IN AZERBAIJAN Tuesday, 26 November 2025 at 14:00 (La Cercle Munster, 5-7 Rue Münster, 2160 Luxembourg) PROGRAM 14:15-14:25 Opening remarks Ambassador Vaqif Sad ÕTRY 14:30-15:15 Keynote speech Mr. Vusal Gasimli, Executive Director of the Center for Analysis of Economic Reforms and Communication of the Republic of Azerbaijan 15:15-16:00 Q&A session / Open discussion 16:00-17:30 Reception/Networking The Embassy of the Republic ofAzerbaijan to the Kingdom of Belgium and the Grand Duchy of LuxembourgMission t the European Union