JUNE 2021
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ESG RISKS MANAGEMENT 
AND SUPERVISION
What are ESG risks 
and why are they important?
Environmental, social and governance (ESG) matters 
may have a positive or negative impact on house­
holds, corporates and financial institutions. Notably, 
scientific evidence (1) suggests that climate change 
and environmental degradation, and the associated 
need to transition towards an environmentally sus­
tainable economy, will lead to changes in the real 
economy that will in turn impact the financial sector 
through new risks and opportunities. Environmental 
risks include the physical impact of global warm­
ing which may make some geographies higher risk, 
and transition risks as public policy, technological 
advancements and market sentiment may lead to 
some activities being phased out.  Social risks in­
clude the negative financial impacts linked to fac­
tors such as inequality, health or labour relations, 
whereas governance risks include the negative fi­
nancial impacts linked to factors such as executive 
leadership or bribery and corruption.
(1)	 See e.g. reports from the Intergovernmental Panel on Climate 
Change (IPCC) e.g. IPCC (2018), ‘Global Warming of 1.5°C - 
Summary for Policymakers’
Banks and investment firms can be impacted by 
ESG risks through their core business activities, 
i.e. through their lending and investing activities: 
the financial risks stemming from the current or 
prospective impacts of ESG factors on their coun­
terparties or invested assets. For example, coun­
terparties can be affected by the physical effects 
of climate change, such as floods impacting prop­
erties, or by policy, technology or market changes, 
such as consumers’ preferences for sustainable 
products that arise as we move towards a more 
sustainable economy. In addition, banks and invest­
ment firms also have an impact on the environment 
and society through their lending and investments 
(the ‘double-materiality’ of ESG risks).
Because of their scale, breadth, and complexity, ESG 
risks can impact the financial system and economy 
as a whole, with potential systemic consequences. 
Institutions need to build their resilience to ESG risks 
across different time horizons, by taking a compre­
hensive and forward-looking view, as well as early 
and proactive actions, under supervisory scrutiny.

E U R O P E A N  B A N K I N G  A U T H O R I T Y  -  F A C T S H E E T  O N  E S G  R I S K S  M A N A G E M E N T  A N D  S U P E R V I S I O N
2
What is the EBA’s role?
The EBA is assessing and recommending how to best include ESG risks 
into the banking regulatory and supervisory framework, with an empha­
sis on climate and environmental risks in the first stage although social 
and governance risks are already important and necessitate attention.
Building on its participation in international and European fora, 
the EBA provides common definitions of ESG risks, describes their 
transmission channels and lays out recommendations on incorpo­
rating these risks into disclosures, risk management and supervi­
sion. ESG disclosures will be key in allowing stakeholders to assess 
banks’ environmental risks and their sustainable finance strategy (2).
The EBA provides institutions with supervisory expectations on how to 
build a resilient business model and risk management system to en­
sure their preparedness for ESG-related challenges. Incorporating ESG 
risks-related considerations in strategies and objectives, integrating 
ESG risks in governance structures, and managing these risks as driv­
ers of financial risks are among the actions expected from institutions. 
These actions will be increasingly reflected in the regulatory framework. 
Furthermore, the EBA will include ESG risks in its guidance on the su­
pervisory review and evaluation process performed by EU supervisors.
The EBA also sees a need to pursue work and test new methods, 
such as scenario analyses, to assess the resilience of institutions to 
ESG risks, in order to improve understanding on the robustness of 
their business model and investment strategies (3). Both institutions 
and supervisors should develop methodologies to assess the future 
possible impacts of ESG risks.
(2)	 The EBA is developing standards in this area [ESG disclosures factsheet].
(3)	 See EBA pilot exercise on climate risk mapping banks’ exposures to climate risk and 
providing an insight into the green estimation efforts banks have carried out so far.
Stay in touch
https://eba.europa.eu/
 EBA_News
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© EBA, 2021
Luxembourg: Publications Office of the European Union, 2021
Reproduction is authorised provided the source is acknowledged.
Print
ISBN 978-92-9245-743-3
doi:	10.2853/65085
DZ-03-21-290-EN-C
PDF
ISBN 978-92-9245-744-0
doi:	10.2853/685832
DZ-03-21-290-EN-N
WHY SHOULD INSTITUTIONS 
AND SUPERVISORS TAKE 
ACTION NOW?
The needed transition towards a more 
sustainable economy will spur new 
business opportunities but will also 
expose financial institutions to risks 
stemming from the transition. At 
the same time, financial institutions’ 
assets will be exposed to changing 
physical conditions. 
Although these risks are likely to fully 
materialise over the long-term, action 
is needed now to identify what insti­
tutions’ and supervisors’ responses 
should be and to progressively start 
implementing the necessary steps. 
Given the potential of ESG risks to 
fundamentally change the way EU 
economies work, a strategic approach 
must be taken.
The actions taken by the EBA to sup­
port the full incorporation of ESG risks 
by institutions and supervisors aim to 
safeguard the resilience of the finan­
cial sector in the short-, medium- and 
long-term and ensure that banks and 
investment firms are well-equipped 
and -positioned to effectively address 
ESG risks and to support the sustain­
ability transition.
EBA
ESG COMMON 
DEFINITIONS
ESG RISK 
MANAGEMENT
ESG RISK IN 
SUPERVISION 
INDICATORS, 
METRICS AND 
METHODS TO 
EVALUATE ESG RISKS
Business strategies and 
business processes
Governance and Risk Management 
Recommendations to Industries
Recommendations to Competent Authorities 
ESG factors as ﬁnancial risks’ drivers
Longer time horizon for 
supervisory assessment
ESG factors and risks
    Risk drivers   
Transmission channels
E, S and G indicators and metrics
Tools and methods to evaluate, 
estimate and incorporate ESG risks