Response to consultation on revised Guidelines for common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing
Q1. What are the respondents’ views on the overall amendments and clarifications made to the revised guidelines (across Titles 2 – 12)?
NA
Q2. What are the respondents’ views on the integration of ESG risks and factors across the existing SREP elements in the revised guidelines?
WWF EPO welcomes the integration of ESG risks across different SREP elements and supervisory stress testing, facilitating the fulfilment of the EU legislative requirements as well as the operationalisation of other EBA and ESAs guidelines.
We particularly support and welcome that ESG risks are not distinguished as a stand-alone category of risk in SREP assessments, recognizing the interconnected nature of ESG risks with traditional economic and financial risk categories.
However, WWF EPO would like to raise four issues that remain problematic, and should be better addressed by EBA (with references provided at the end of the document):
1. The need for more recognition of the specific characteristics of environmental risks. ESG risks typically materialise through the traditional categories of financial risks with an additional complexity and nuance that is currently not reflected in the guidelines. While EBA does recognize the forward-looking nature of ESG risks, it falls short in recognizing (i) the high level of uncertainty that characterizes ESG risks, (ii) their potential tail risks and (iii) specifically, climate/environmental irreversible tipping points and their non-linear, exponential risk potential: all of them, if unaccounted, can significantly distort the results of supervisory risk management. In this context, we welcome the inclusion of a long-term perspective, including a time horizon of at least 10 years, as this aligns with other EBA expectations. However, such a horizon still remains insufficient to capture climate- and nature-related risks – particularly those that are more likely to materialise over longer timeframes – and should be articulated more clearly and applied more consistently across the SREP Guidelines. The long-term perspective should be extended to 30 years or at least until 2050, aligning with the Paris Agreement-agreed benchmark.
2. The need for the assessment of transition plans’ robustness and alignment with climate objectives and institutions’ own climate commitments. The EBA appropriately requires supervisors to consider prudential transition plans and includes an assessment of the robustness of banks’ transition planning processes within the Business Model Analysis and internal governance review. However, it does not explicitly clarify that supervisory assessments should cover both the robustness of these plans and their alignment with climate objectives and institutions’ own climate commitments (e.g. net-zero emissions by 2050 consistently with the Paris Agreement and the EU Climate law), nor is this assessment consistently reflected across other SREP building blocks, including the assessment of risks to capital.
Such robustness and alignment are clearly relevant from a prudential perspective and are critical for monitoring banks’ resilience to the transition towards a sustainable economy. Banks’ transition plan misalignment may imply greater exposure to sectors and activities with concentrated climate-related risks, notably the fossil fuel sector. In this way, misaligned banks are exposed to elevated transition risks and may contribute to the accumulation of systemic risks by increasing the likelihood of a disorderly transition and exacerbating physical risks.
The ECB has repeatedly underlined the prudential relevance of alignment, noting that EU banks remain insufficiently aligned with climate objectives and that such misalignment may be problematic from a risk perspective (ECB, 2024). Notably, the ECB identifies alignment assessment as a widely recognised forward-looking tool for quantifying transition risks in credit portfolios, complementing scenario analysis, stress testing and exposure analysis by providing insight into whether institutions are moving towards the transition. ECB research has also highlighted supervisory risks arising from insufficiently substantiated net-zero commitments, including greenwashing risks (ECB, 2024).
In this context, treating transition planning processes – and the plans’ alignment with climate objectives and commitments – as cross-cutting elements of the SREP, rather than limiting them to the Business Model Analysis, would ensure that transition risks are consistently reflected in supervisory risk assessments and mitigation measures, including in the assessment of risks to capital, in line with the broader treatment of ESG risks and emerging supervisory practices.
We therefore recommend EBA to clarify that supervisory assessments should cover both the robustness of these plans and their alignment with climate objectives and institutions’ own climate commitments, and ensure they are cross-cutting elements of the SREP and as such are consistently reflected in supervisory risk assessments and mitigation measures, including in the assessment of risks to capital.
3. A distinct treatment of fossil fuel-related exposures is warranted. The EBA refers to the need for competent authorities to assess assets and activities that concentrate potential risks; however it does not explicitly distinguish fossil fuel–related exposures, despite their proven particularly high-risk profile. Notwithstanding their inherent limitations, climate scenario analyses and stress-testing exercises conducted by European supervisors consistently identify fossil fuel–related activities as among the highest-risk exposures. Notably, ECB and ACPR exercises show that transition risks are highly concentrated in carbon-intensive sectors, with fossil fuel-related exposures contributing disproportionately to credit losses and default risk, especially under delayed or disorderly transition scenarios (ESRB, 2023; ECB, 2023; ECB, 2021).
Fossil fuel assets are uniquely exposed to transition risk through stranded assets, meaning they may lose value or become unusable prematurely as climate regulations tighten and demand for carbon-intensive fuels declines. This is particularly true for new production projects, which are incompatible with 1.5°C and well-below 2°C pathways (i.e. the boundaries of the Paris Agreement), take decades to recover their initial investment, and face a high likelihood of early closure or forced displacement of existing assets, making them a major risk according to the International Energy Agency (IEA, 2023). This implies that banks’ ongoing financing of fossil fuel development is inconsistent with their net-zero and climate commitments, thereby exposing them to additional transition risks (ECB, 2024).
The distinction of fossil fuel exposures has also been already used in ECB and ESRB analyses on the macroprudential framework of climate risk management (ECB and ESRB, 2022; ESRB, 2023). At the same time, introducing limits on financial services to the fossil fuel industry is identified by the ECB as good practice in climate and environmental risk management (ECB, 2022). This distinction is also technically feasible: banks already collect and disclose fossil fuel exposure data in aggregate terms and coal, oil, gas disclosures are required for large companies under the CSRD, meaning that supervisors can build on existing practices without imposing disproportionate additional requirements.
The European Insurance and Occupational Pensions Authority (EIOPA) has also explicitly recognised that the financial risks of fossil fuel investments are underestimated and recommended adjustments to solvency capital requirements for insurers (EIOPA, 2024). Finally, the EBA Guidelines on the management of ESG risks explicitly mention fossil fuel exposures (EBA, 2025).
4. Finally, the EBA should encourage supervisory authorities to start assessing activities with high nature-related exposures and take proactive and precautionary measures without delay. Nature-related risks – such as the loss of mass stabilisation services that prevent soil erosion, or the degradation of freshwater ecosystems, which together represent the most critical ecosystem dependencies of Eurozone banks’ NFC portfolios (ECB, 2023) – will inevitably have significant impacts on financial institutions’ portfolios and business models. We point out that nature-related risks should be treated equally to climate-related risks in stress testing, meaning spanning both physical and transition risks as well as all the conventional financial risk categories. The ECB research has shown that 75% of all corporate loan exposures in the euro area have a strong dependency on at least one ecosystem service, proving Eurozone banks’ high nature exposures (ECB, 2023). Similar assessments with findings of significant nature exposure have been conducted by national regulators, notably Banque de France (Banque de France, 2021) and DeNederlandscheBank (DeNederlandscheBank, 2020).
While data gaps and methodological challenges may persist, these should not justify delayed action. Supervisory authorities can already act by promoting risk-mitigating measures, including the reduction of exposures to environmentally harmful activities. Moreover, significant work has already been completed to help financial institutions measure and address nature-related risks: guidance is available through (i) the Network for Greening the Financial System’s guidance for central banks and supervisors (NGFS, 2023), (ii) the Task Force on Nature-related Financial Disclosures (TNFD), (iii) the Science-Based Targets Network for nature (SBTN).
A similar precautionary approach should apply to social and governance risks, which should be gradually incorporated into supervisory expectations, starting as early as possible, rather than deferred until perfect data or methodologies become available.
Sources and references:
ECB, Risks from misalignment of banks’ financing with the EU climate objectives, 2024.
ECB, An examination of net-zero commitments by the world’s largest banks, 2024.
ESRB, Towards macroprudential frameworks for managing climate risk, 2023.
ECB, The Road to Paris: stress testing the transition towards a net-zero economy, 2023.
ECB, Shining a light on climate risks: the ECB’s economy-wide climate stress test, 2021.
ESRB and ECB, The macroprudential challenge of climate change, 2022.
ESRB, Towards macroprudential frameworks for managing climate risk, 2023.
ECB, Good practices for climate and environmental risk management, 2022.
EIOPA, Final Report on the Prudential Treatment of Sustainability Risks for Insurers, 2024.
EBA, Guidelines on the management of environmental, social and governance (ESG) risks, 2025.
IEA, World Energy Outlook 2023, 2023 / IEA, The Oil and Gas Industry in Net Zero Transitions, 2023.
ECB, An examination of net-zero commitments by the world’s largest banks, 2024.
ECB, Living in a world of disappearing nature: physical risk and the implications for financial stability, Occasional Paper Series, 2023.
Banque de France, A “Silent Spring” for the Financial System? Exploring Biodiversity-Related Financial Risks in France, 2021.
DeNederlandscheBank, Indebted to Nature: Exploring biodiversity risks for the Dutch financial sector, 2020.
NGFS, Nature-related Financial Risks: a Conceptual Framework to guide Action by Central Banks and Supervisors, 2023.
Q3. What are the respondents’ views on the enhanced simplification and proportionality aspects?
NA
Q4. What are the respondents’ views on the introduction of a high-level escalation framework?
NA
Q5. Do you consider the coverage and level of detail of this Title appropriate for its intended purpose?
NA
Q6. Do you consider the coverage and level of detail of this Title appropriate for its intended purpose?
NA
Q7. What are the respondents’ views on the updated section 5.7 “ICT systems, risk data aggregation and risk reporting”?
NA
Q8. Do you consider the coverage and level of detail of this Title appropriate for its intended purpose?
NA
Q9. Do you agree with the treatment proposed to account for transfer pricing risk in the context of trading book activities? Please elaborate.
NA
Q10. What are the respondents’ views on the integration of the EBA GL on ICT risk assessment under the SREP (EBA/GL/2017/05) and DORA aspects?
NA
Q11. What are the respondents’ views on the introduction of operational resilience (section 6.4.5)?
NA
Q12. What are respondents’ views on the additional section on CSRBB and the combined score for IRRBB and CSRBB?
NA
Q13. What are the respondents’ views on the proposed assessment of the interaction between Pillar 1 and Pillar 2 requirements and on the proposed approach for operationalizing concerning cases where an institution becomes bound by the output floor?
NA
Q14. What are the respondents’ views on the merger with the ‘SREP liquidity assessment’ and the merger of the scores into a combined liquidity and funding adequacy score?
NA
Q15. What are the respondents’ views in relation to enhanced communication aspects?
NA
Q16. Do you consider the coverage and level of detail of this Title appropriate for its intended purpose?
NA
Q17. Do you consider the coverage and level of detail of this Title appropriate for its intended purpose?
NA
Q18. Do respondents consider the guidance for the assessment of third-country branches appropriate and sufficiently clear?
NA