EBA/GL/2025/04: A new guide to sustainable finance

The “Guidelines on environmental scenario analysis” (EBA/GL/2025/04) published on 5 November specify the existing regulatory requirements for dealing with environmental risks within the European financial system. From 1 January 2027, the guidelines require environmental and, in particular, climate risks to be systematically integrated into risk management, capital planning and business strategy using structured scenario analyses.

What’s new in the guidelines? An overview:

The focus of EBA/GL/2025/04 is on detailed specifications for conducting scenario analyses for environmental and climate risks (physical and transition risks). The guidelines state that scenario analyses serve to examine financial resilience (short-term, <5 years) and business model resilience (long-term, at least 10 years). Institutions must identify relevant transmission channels, select suitable scenarios (e.g. NGFS, IEA, IPCC) and ensure data management and governance. Similar to EBA/GL/2025/01 on ESG risk management, the scope and depth of the analyses depend on the materiality of the risks, size and complexity of the institution. The results should be incorporated into strategy, risk management and, if applicable, capital planning.

EBA/GL/2025/04: Deep Dive

At their core, the guidelines do away with the often one-dimensional and detached treatment of ecological risks and anchor them as an integral part of the entire institution ([60], [62]). Based on a dual structure already presented in the “Draft Guidelines on ESG Scenario Analysis” (January 2025), the approach reflects different methodological horizons: The implementation of short-term “climate stress tests” for the quantitative review of capital and liquidity resilience [87ff.] in contrast to long-term, strategic “climate resilience analysis”, which is aimed at the adaptability of the business model to transitory and physical environmental changes [99ff.].

Scenario analysis is thus becoming a central governance and management tool that takes on a strategic orientation function beyond mere compliance ([60], [61], [63]). The guidelines define the methodological architecture of such analyses, including the requirements for internal validation, consistency and institutional anchoring. What is new here is the emphasis on a uniform scenario narrative to ensure organisation-wide coherence and reduce methodological and regulatory ambiguity ([62], [64]).

Implicitly, the guidelines offer institutions the opportunity to utilise environmental risks as a source of strategic differentiation. The systematic analysis of transmission channels – the causal paths between ESG risk drivers and financial risk positions – allows preventive identification of risks (but also opportunities!) in the portfolio [68ff.]. The use of internationally recognised reference scenarios (IPCC, NGFS, IEA) in conjunction with individual adaptation of the scenarios by the institution ensures feasibility, methodological comparability and relevance ([77], [78], [79]).

The guidelines also recognise the inherent uncertainties of economic-ecological modelling and at the same time emphasise that institutions should actively integrate these into their risk and decision-making processes, for example through sensitivity analyses and iterative validations. The guidelines thus address the limitations of traditional macroeconomic frameworks with regard to non-linear dynamics, feedback effects and long-term path dependencies [31ff.]. It is explicitly recommended that quantitative scenario results be interpreted as stochastic ranges and not as deterministic truths ([33], [34]).

In this respect, the guidelines also emphasise the complementary role of qualitative expert estimates, especially when the data basis is incomplete ([110], [111]). Overall, such methodological humility is to be welcomed, as it promotes a risk-adequate interpretation and prevents the fictitious accuracy of model results. The principle of proportionality, which differentiates the requirements according to the size, complexity and risk profile of the institutions, is in the same vein: While simplified, qualitative approaches or sensitivity analyses are permissible for smaller institutions ([67d], [84], [85]), larger institutions with material environmental exposures are encouraged to use advanced, data-based modelling approaches [67e,f].

The guidelines also call for the institutional integration of scenario analyses into existing governance structures. A robust organisational framework with cross-functional participation, regular review and transparent documentation is mandatory ([64], [65]). The explicit involvement of management ensures accountability and traceability towards internal and external stakeholders ([62]). Operationally, on the other hand, implementation implies the expansion of data analysis capacities and technical infrastructure. The identification and modelling of relevant transmission channels and the creation of institution-specific scenarios require extended data collection, validation and analysis capabilities ([24], [25], [69]). The guidelines leave room for methodological manoeuvre and deliberately welcome the use of external expertise in order to close institutional competence gaps ([77], [78], [79]).