The European Banking Authority (EBA) has issued its Guidelines on Environmental Scenario Analysis1 (effective January 2027), complementing its ESG risk management guidelines2 coming into force in 2026. The scenario analysis guidelines represent a significant regulatory milestone, requiring institutions to adopt forward-looking approaches to assess the resilience of their business models under environmental stress into prudential frameworks. The EBA aims to ensure that banks can withstand both short-term shocks and long-term structural changes driven by climate factors. This regulatory shift reflects a growing recognition that climate risks can manifest as credit, market and operational risks, threatening financial stability.
The implications are significant for banks. Scenario analysis becomes central to governance, Internal Capital Adequacy Assessment Process (ICAAP) / Internal Liquidity Adequacy Assessment Process (ILAAP) and strategic planning, influencing portfolio rebalancing and capital allocation. Institutions must adopt scientifically grounded scenarios and develop robust methodologies to assess physical and transition risks. Larger banks will require quantitative models, while smaller institutions may use qualitative approaches under proportionality principles.
To prepare for 2027, operational readiness demands early investment in climate risk expertise, data infrastructure and board-level oversight. Banks should leverage NGFS scenarios as a baseline and conduct pilot exercises to test methodologies and identify gaps before full implementation. Supervisors will enforce transparency and consistency through a “comply or explain” approach.
“Climate change is no longer a distant threat; it is a systemic risk with profound implications for financial stability. Banks face mounting pressure to integrate environmental risks into their governance, risk management and strategic planning frameworks.”
Pierre-Alexandre Germont Director – Global Climate Risk Lead
The legal foundation for these guidelines lies in Article 87a(5) of the Capital Requirements Directive (CRD)3 and Article 177(2a) of the Capital Requirements Regulation (CRR)4. These provisions mandate institutions to consider environmental risks in their ICAAP and stress testing frameworks.
Traditional risk models struggle to capture climate-related risks due to their non-linear impacts, long time horizons and deep uncertainty. Scenario analysis offers a solution by enabling banks to explore plausible futures and assess vulnerabilities under different pathways. The EBA’s approach aligns with global best practices, notably the Task Force on Climate-Related Financial Disclosures (TCFD) and the Network for Greening the Financial System (NGFS)5, which advocate for scenario-based assessments to manage climate risk.
Furthermore, these guidelines reflect lessons learned from supervisory exercises such as the European Central Bank’s (ECB) 2022 climate stress test (CST)6 and the Bank of England’s (BOE) Climate Biennial Exploratory Scenario (CBES)7, which revealed significant data gaps and modelling challenges across the industry. They also resonate with the Prudential Risk Authority’s (PRA) Supervisory Statement (SS) 4/258, following its consultation paper 10/259, which was released and enforced on 3December 2025 and significantly strengthens the PRA’s climate risk management expectations in the UK.
“Climate risk is now firmly embedded in supervisory expectations. Banks are being assessed on how credibly climate scenarios translate into traditional risk types and whether this is reflected in their capital and, increasingly, liquidity planning.”
Eric Cloutier Partner - Global Head of Banking Regulations
The scenario analysis guidelines focus exclusively on environmental risks, with climate risk as the primary driver, as social and governance risks are excluded for now. The EBA introduces a two-pillar approach to scenario analysis, ensuring that banks address both immediate shocks and structural transitions. Stress testing focuses on short-term financial resilience, while resilience analysis evaluates long-term business model sustainability. Banks must select scientifically grounded scenarios — such as those from the NGFS, Intergovernmental Panel on Climate Change (IPCC) and International Energy Agency (IEA) — and identify transmission channels for physical and transition risks.
Implementation principles emphasise proportionality, integration with the ICAAP and ILAAP, and strong governance. Larger banks are expected to deploy quantitative models, while smaller institutions may rely on qualitative approaches. Supervisors will apply a “comply or explain” approach, requiring transparency and consistency in scenario assumptions and methodologies.
“Under the EBA scenario analysis framework, banks now need defensible, auditable models that translate climate scenarios into credit parameters, capital outcomes and risk limits across time horizons.”
Xavier Larrieu Partner - Co-Head of Quantitative Solutions UK
Scenario analysis is now central to risk governance and strategic planning. Banks must align scenario outputs with ICAAP and ILAAP, transition plans under Corporate Sustainability Reporting Directive (CSRD) and make strategic decisions on portfolio rebalancing and capital allocation. Data gaps and modelling complexity pose significant challenges. Institutions must secure granular emissions data, apply robust methodologies and establish governance frameworks to manage uncertainty. Achieving operational readiness requires investment in climate-risk expertise, scenario-generation tools and board-level oversight. Supervisors, in turn, expect transparency in assumptions, consistency across frameworks and clear evidence of accountability. For example, banks may need to develop sector-specific models to assess transition risks in carbon-intensive industries or evaluate physical risks for real estate portfolios exposed to flooding or wildfires. These efforts will require collaboration with external data providers and industry consortia to improve data quality and comparability.
“The EBA guidelines move climate scenario analysis more broadly into the banks’ operations. Banks must now demonstrate, with evidence, how scenario outputs are used in credit policies, limit frameworks, portfolio steering and capital planning.”
Gregory Marchat Partner - Financial Services
The EBA’s guidelines reflect on lessons from earlier exercises such as the ECB CST (2022) and the BOE’s CBES (2021), highlighting the importance of granular asset-level data and long-term horizons. The NGFS advocates for harmonised scenarios and integration with transition planning, while consulting firms emphasise that scenario analysis is not just a compliance tool but a strategic lever for identifying opportunities in green finance and supporting portfolio decarbonisation. For instance, banks can use scenario analysis to identify sectors likely to benefit from the energy transition, enabling them to allocate capital toward sustainable investments. Moreover, scenario analysis can inform product development, such as green bonds and sustainability-linked loans, creating new revenue streams while mitigating risk.
To prepare for 2027, banks should start early by building internal capacity and governance. They should leverage NGFS scenarios as a baseline, integrate outputs into ICAAPs and strategic decisions, invest in data infrastructure and engage stakeholders to ensure board-level oversight and cross-functional collaboration. Institutions should also consider conducting pilot exercises to test methodologies and identify gaps before full implementation. Training programs for senior management and risk teams will be essential to ensure understanding and effective use of scenario analysis. Additionally, banks should explore partnerships with technology providers and climate analytics firms to enhance modelling capabilities and data quality.
The EBA’s Guidelines on Environmental Scenario Analysis mark a turning point in prudential regulation. By embedding climate risk into stress testing and strategic planning, they are pushing banks to move beyond compliance and towards resilience and opportunity. Institutions that act early will not only meet regulatory expectations but also position themselves as leaders in the transition to a sustainable economy. In doing so, they will strengthen their long-term viability and contribute to global efforts to combat climate change.
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[1] Guidelines on environmental scenario analysis.pdf; [2] Final Guidelines on the management of ESG risks.pdf; Managing ESG and climate risks; [3] EUR-Lex - 52021PC0663 - EN - EUR-Lex; [4] Article 177, CRR, Regulation 575/2013, judict; [5] NGFS phase V climate risk scenarios: good progress however unaddressed limitations remain: Forvis Mazars; [6] 2022 climate risk stress test; [7] Results of the 2021 Climate Biennial Exploratory Scenario (CBES): Bank of England; [8] Supervisory statement 4/25 – Enhancing banks’ and insurers’ approaches to managing climate-related risks; [9] New expectations for financial services firms on climate risk: everything you need to know on CP10/25 - Forvis Mazars
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