Response to consultation on revised Guidelines for common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing
Go back
Q2. What are the respondents’ views on the integration of ESG risks and factors across the existing SREP elements in the revised guidelines?
Reclaim Finance strongly supports the integration of ESG risks across SREP. We highlight the proposal to integrate ESG risk in the draft guidelines is highly relevant, necessary to fulfill requirements in EU legislation and largely coherent with other EBA guidelines. However, we also note that the sentences aiming to integrate ESG risk are often especially vague, leading to uncertainties and instability in the supervisory process. Specifically:
The EBA rightfully emphasizes the forward-looking nature of ESG risk - and especially climate-related risk - in several instances. Yet, it fails to acknowledge the high level of uncertainty that characterizes environmental risk and the fact it should thus warrant a precautionary approach (see: Hugues Chenet and al, “Finance, climate-change and radical uncertainty: Towards a precautionary approach to financial policy”, Ecological Economics, 2021 / Hugues Chenet and al, Developing a precautionary approach to financial policy – from climate to biodiversity, INSPIRE, 2022). Furthermore, the guidelines do not push supervisors to consider how potential tail risks - including those associated with climate and nature tipping points - are assessed and managed, generating additional risk (see: UZH, “Crucial Gaps in Climate Risk Assessment Methods”, 2024).
The EBA rightfully requires supervisors to integrate prudential transition plans but does not explicitly state that the robustness of the plan and its alignment with climate goals and entities’ own commitments should be considered. Yet:
- Alignment is relevant to financial supervision and could play an important role in risk management and mitigation. A misaligned bank exposes itself to heightened transition risks – including litigation risks (see: Frank Elderson, “Come hell or high water”: addressing the risks of climate and environment-related litigation for the banking sector”, ECB, 2023) - while also contributing to the overall buildup of those risk with an increased probability of “disorderly” transition as well as higher physical risks. A misaligned bank is also likely to be more exposed to sectors and activities that concentrate climate-related risks such as the fossil fuel sector.
- The European Central Bank (ECB) itself underlined that EU banks were not aligned with climate goals and that this could be problematic from a risk perspective (see: ECB, Risks from misalignment of banks’ financing with the EU climate objectives, 2024). This is corroborated by independent analysis from several civil society organizations, including Reclaim Finance (see: Reclaim Finance, Bank transition plans: a roadmap to nowhere, 2025). The ECB notes that: “Alignment assessment is widely recognised as a useful method for quantifying transition risks in a credit portfolio, alongside techniques like scenario analysis, stress testing, exposure analysis and determining financed emissions. While these other methods give an indication of the carbon intensity of a credit portfolio at a certain point in time, alignment assessment provides insight into whether the corporations in a credit portfolio are moving towards low-carbon production. Banks and regulatory and supervisory authorities alike are currently embracing alignment assessment as a tool for evaluating risks and exploring strategies that have a positive impact on the climate.” In an occasional paper, the ECB research team also identified the relevance of the greenwashing risk created by insufficiently substantiated net-zero commitment for supervisors (see: ECB, An examination of net-zero commitments by the world’s largest banks, 2024).
- Making alignment a component of the “forward-looking” information reviewed by supervisors is fully coherent with the inclusion of transition plans in CRD and recently published EBA guidelines on the issue (see: EBA, Guidelines on the management of environmental, social and governance (ESG) risks, 2025). It is also an emerging practice that has been identified in the work of the Network for Greening the Financial System (NGFS) (see: NGFS, Transition Plan Package, 2025). For example, in the US, the scenario modelling approach from the Department of Insurance of California already considers forward-looking plans and alignment with climate scenarios in quantifying the exposure of insurers (see: California Department of Insurance, The hidden cost of delaying climate action for West Coast insurance markets, 2024).
- Additionally, assessing the alignment and robustness of the plans would enable competent authorities to identify elements that are potentially misleading. For example, Reclaim Finance’s research have revealed that most decarbonization targets adopted by banks are not directly related to real-world emissions and can give a misleading representation of banks’ contributions to climate change and the transition (see: Reclaim Finance, Targeting Net-Zero: the need to redesign bank decarbonization targets, 2024). Similarly, Energy Supply Ratios (ESR) adopted by banks are often based on flawed methodologies that misrepresent their overall support to the transition (see: Reclaim Finance, Banking on Business As Usual, 2025).
If it could be made more explicit, the EBA mentions in several instances the need for competent authorities to look at specific assets and activities that concentrate potential risk. However, the EBA does not state that these assets and activities should include fossil fuels. Yet, the EBA should consider that:
- Despite major limitations in scenario and stress testing (see: Sandy Trust and all, The Emperor’s New Climate Scenarios, 2023 / Finance Watch, Finance in a hot house world, 2023), exercises all identified fossil fuel activities as higher risk. This is notably the case of the stress test conducted by the ECB, the ACPR and other European regulators and supervisors (see: ESRB, Towards macroprudential frameworks for managing climate risk, 2023 / ECB, The Road to Paris: stress testing the transition towards a net-zero economy, 2023 / ACPR, Les principaux résultats de l'exercice pilot 2020, 2021 / Luis de Guindos, “Shining a light on climate risks: the ECB’s economy-wide climate stress test”, ECB, 2021). Scenario analysis conducted by the Department of Insurance of California further underlined that the plans of oil and gas companies in US West Coast insurers’ portfolios are not aligned with policies implemented in 2021 implies “exposure to transition risk even in the absence of any additional collective climate action”, and that coal and oil and gas have the highest probability of default in delayed/disorderly transition scenarios (see: California Department of Insurance, Executive Summary The hidden cost of delaying climate action for West Coast insurance market, 2024).
- Beyond the results of stress tests and quantitative analysis, fossil fuel assets are notably exposed to a “stranding risk” (see: Carbon Tracker, Oil & Gas: 2023 Assessments for Climate Action 100+, 2023 / Harry Benham, “Energy is a very long game: yet fossil fuel companies are taking a lot of short-term risks”, Carbon Tracker, 2024 / Institut Rousseau and al, Actifs fossiles, les nouveaux subprimes ?, 2021). This is especially the case for assets tied to new production projects, as these assets are not needed in a scenario where actions are carried out to limit global warming to 1.5°C and will take decades to recover their investment cost. New fossil fuel production assets have a high chance to be closed before amortization or require the faster closure of pre-existing assets, and thus are a major source of risks as identified by the International Energy Agency (IEA) (see: IEA, World Energy Outlook 2023, 2023 / IEA, The Oil and Gas Industry in Net Zero Transitions, 2023 / IEA, NZE 2023 Update, 2023). This also means that bank’s continued support to fossil fuel developers (see: Rainforest Action Network and al, Banking On Climate Chaos 2023, 2023 / Reclaim Finance, Oil and Gas Policy Tracker, online tool / Reclaim Finance, Coal Policy Tracker, online tool) breaches their net-zero and climate commitments, thus bringing additional transition risks (see: ECB, An examination of net-zero commitments by the world’s largest banks, 2024).
- At a macro-prudential level, the ECB and European Systemic Risk Board (ESRB) have long used fossil fuel exposures and related criteria in their analysis (see: ESRB and ECB, The macroprudential challenge of climate change, 2022 / ESRB, Towards macroprudential frameworks for managing climate risk, 2023). Additionally, establishing restrictions on financial services to the fossil fuel industry is an element of the good practices identified by the ECB on climate and environmental risk management (see: ECB, Good practices for climate and environmental risk management, 2022), and that excessive support to this industry is one of the factor of misalignment of European banks with climate goals identified by the central bank (see: ECB, Risks from misalignment of banks’ financing with the EU climate objectives, 2024).
- Finally, the EBA Guidelines on the management of ESG risk explicitly mention fossil fuel exposures (see: EBA, Guidelines on the management of environmental, social and governance (ESG) risks, 2025), while the EIOPA acknowledged the riskiness of fossil fuel assets (see: EIOPA, “EIOPA recommends a dedicated prudential treatment for insurers’ fossil fuel assets to cushion against transition risks”, 2024)
The EBA should encourage competent authorities to start looking at how banks’ exposure to activities concentrating nature related risk, starting with assets and activities with a large impact on nature and biodiversity:
- Preliminary work from regulators – and notably from the Banque de France and NGFS (see: Banque de France, A “Silent Spring” for the Financial System? Exploring Biodiversity-Related Financial Risks in France, 2021 / Banque de France, Bulletin 237/7 - Biodiversity loss and financial stability: a new frontier for central banks and financial supervisors?, 2021 / NGFS-INSPIRE, Central banking and supervision in the biosphere: An agenda for action on biodiversity loss, financial risk and system stability, 2022) – has shown that biodiversity risk can be significant and widespread in the economy and must be addressed.
- While approaches to handle this risk are not as elaborated as for climate, significant work has already been launched - notably through the Task Force on Nature-Related Financial Disclosure (TNFD), Science-based targets for nature (SBTN) – and biodiversity risks seem to share many characteristics with climate-related risks (see: Hugues Chenet and al, “Developing a precautionary approach to financial policy – from climate to biodiversity”, INSPIRE, 2022). Furthermore, a large body of scientific evidence is available (see: IPBES assessments), and key sectors and companies have been identified as potentially high-risk for deforestation (see: Forest 500, Annual Report 2024: A decade of deforestation data, 2023 / Ministère de la Transition Ecologique, “Tableau de bord d'évaluation des risques de deforestation”, SNDI, 2021).
- Supervisors can start by focusing on deforestation, where data is more readily available and where bank exposure has already been analyzed by civil society organizations (see: Forest&Finance, Banking On Biodiversity Collapse 2023, 2023 / Forest 500, Annual Report 2024: A decade of deforestation data, 2023).
- The EBA encourages competent authorities to look at a “long” time horizon of at least 10 years. While this time horizon is consistent with other EBA recommendations and expectations, it is insufficient to capture climate and nature related risk, and especially acute risks that are likely to materialize in the longer term.
Consequently, we suggest the following changes:
Title 4. Paragraph 68. Point a – The EBA should encourage competent authorities to include in their analysis:
- How the entity accounts for potential tail risks, including those arising from climate and nature tipping points.
- What is the entity’s exposure to coal, oil and gas, how it evolves over time (past and future plans) and what specific policies are put in place to manage related risks.
- Whether the climate transition plan is sufficiently transparent and robust (including not only decarbonization targets, but also a dedicated action plan).
- Whether and how the entity manages its exposure to activities with a significant deforestation risk and what specific policies are put in place to manage related risks.
- Title 4. Paragraph 69. Point c. The EBA should:
- Encourage competent authorities to form their opinion both on the “plausibility” and “robustness” of the strategic plan and financial forecasts.
Extend the long time horizon to at least 20 years.
Title 6. Paragraph 149. The EBA should integrate in the “specific characteristics” of ESG factors and ESG the radical uncertainty tied to climate related risks and the potential occurrence of climate tipping points as a form of tail risk.
- Title 6. Paragraph 238. The EBA should:
- Add to the list of indicators for this assessment the degree of alignment of the entity’s climate plan with international climate goals and its own climate commitments.
- Explicitly mention fossil fuels in point f.