How to Meet EBA Guidelines for Managing Third-Party ESG Risks

The European Banking Authority (EBA) has issued its final Guidelines on the Management of Environmental, Social, and Governance (ESG) Risks, detailing how EU-regulated financial institutions should identify, measure, manage, and monitor these risks to ensure short-, medium-, and long-term resilience goals. The Guidelines establish a comprehensive framework for managing ESG-related risks and will go into effect on January 11, 2026, for large institutions and on January 11, 2027, for small and non-complex institutions.

This post explores key aspects of the Guidelines, third-party considerations, and best practices for meeting third-party ESG reporting requirements.

Key Aspects of the EBA Guidelines on Managing ESG Risks

The EBA Guidelines on Managing ESG Risks aim to ensure that financial institutions embed ESG considerations throughout their operations, enhancing resilience to risks posed by environmental, social, and governance factors. These guidelines emphasize assessing risks from external relationships to promote a sustainable and robust financial sector.

Objective and Scope

The objective of the EBA guidelines is to enhance European financial institutions' ability to identify, measure, manage, and monitor ESG risks, ensuring long-term resilience and alignment with sustainability goals. The Guidelines apply to European credit institutions and investment firms, with proportionality considerations for smaller and non-complex entities.

Governance and Strategy

The Guidelines require that institutions incorporate ESG considerations into their business strategies, governance structures, and internal policies. Boards ultimately oversee ESG risk management under the Guidelines, ensuring alignment with the institution's overall strategy.

Cadre de gestion des risques

Financial institutions are required to evaluate how ESG risks may affect their operations and financial position, with ESG-related stress testing and scenario analysis mandatory to understand potential impacts. Institutions must also assess ESG risks from clients, suppliers, and other external counterparties, incorporating findings into their overall risk management processes.

Disclosures and Transparency

The Guidelines say financial institutions should collect and disclose relevant ESG data to improve transparency and enable stakeholders to assess their ESG risk management practices. Disclosures must align with existing regulatory frameworks, such as the EU taxonomy for sustainable activities.

Supervisors will assess institutions' compliance with ESG risk management standards, considering their integration into governance, strategy, and risk frameworks.

Third-Party and Supply Chain Considerations in the EBA Guidelines on Managing ESG Risks

While the Guidelines primarily focus on institutions' internal processes, they also emphasize the importance of considering ESG risks associated with third-party entities, such as clients, suppliers, counterparties, and other business partners.

Financial institutions are expected to evaluate the ESG profiles of these third parties and incorporate findings into their risk assessments and decision-making processes. This approach enables institutions to account for potential ESG risks arising from their external relationships, promoting a comprehensive risk management strategy.

Identify and Assess ESG Risks from Third Parties

Institutions must determine ESG risks associated with their clients, suppliers, and other external parties. Assessing how these entities' ESG practices may impact the institution's risk profile is crucial.

Integrate Third-Party ESG Risks into Risk Management Frameworks

Third-party ESG risks should be integrated into the institution's overall risk management processes to ensure effective monitoring and mitigation of potential risks.

Develop Contingency Plans

Institutions are expected to prepare plans to address financial risks stemming from ESG factors, including those arising from third-party relationships. These plans should outline strategies for maintaining resilience in the face of ESG-related disruptions.