The European Banking Authority launched a consultation in May 2025 on amended disclosure requirements for environmental, social and governance risks. The changes do not introduce additional requirements but would streamline aspects of the European Commission’s Implementing Regulation on Pillar 3 disclosures. For instance, the process for smaller banks would be simplified, introducing greater flexibility by subjecting certain elements to materiality assessments.
Even with this added flexibility, most banks still have a long way to go to provide comprehensive climate-related information increasingly expected by market stakeholders and supervisors. Exploratory climate stress tests – such as those conducted by the European Central Bank and Bank of England – flagged data gaps as a key hurdle to gauging exposure to climate risk and developing related risk management frameworks.
Banks’ main climate exposures, both from risk and impact perspectives, are through their loan and investment portfolios. Corporate disclosures help banks to assess the exposures resulting from their lending and investment activities, and to articulate these and related mitigation measures to investors and other stakeholders.
While increasing disclosure of climate-related information by corporate borrowers in recent years supports banks’ ability to assess client and investment-related emissions – and thus their exposure to transition risk – progress has been patchy. Even in Europe, where disclosure has progressed further than in other regions, the data landscape is ‘incomplete’, according to a report published by the EBA in February 2025. The report noted data challenges when it comes to small to medium-sized enterprises, households and mortgages, with the latter hampering assessment of climate risk exposure in the context of structured finance products and transactions.
Physical risk assessments
One solution for gauging levels of exposure to transition and physical climate risks is using estimates and proxies. To meet this need to measure physical risk, Sustainable Fitch recently developed a new physical risk assessment that evaluates assets’ exposure to a range of perils – such as flooding and wildfire – under different climate scenarios.
In one example, we examined a transaction secured by an Italian residential mortgage portfolio, which faced medium risk (above 40 out of 100 on our scoring scale, where 100 represents the most severe risk) from precipitation in 2025, rising to medium/high risk (above 60 out of 100) by 2075 under a 2.7-degree Celsius-aligned climate scenario.
Regarding transition risks, banks’ exposure is largely a function of the economic sectors to which they are exposed, such as through their lending activities. Emissions-intensive sectors are generally more at risk from the low-carbon transition.
Using our universe of banks receiving ESG entity ratings as a sample, we assessed the exposure of banks to carbon-intensive sectors through the environmental business activity component of our ESG entity ratings. In Sustainable Fitch’s study of 167 rated banks, we found the average BA environmental rating was at the lower end of our scale, indicating negative environmental impact. This reflects the reality that these banks’ lending portfolios continue to include borrowers in sectors such as coal, oil and gas and heavy industry that face regulatory and market pressures to decarbonise in many jurisdictions.
Issues of transparency
Our study also found that many banks are not adequately articulating the financed emissions resulting from this lending to market stakeholders. Institutions’ environmental profiles – the component of the rating that assesses targets, disclosures and policies – was the weakest area for banks, behind their social and governance profiles. Overall, European banks in the sample were more transparent in disclosing their exposure to fossil fuel-intensive activities than North American or Middle Eastern counterparts.
That said, relevant climate-related data should become more widely available to banks as regulators in diverse jurisdictions press ahead with adopting the International Sustainability Standards Board’s reporting standards, which require in-scope entities to disclose emissions, targets and transition plans (if the reporting entity has one).
We anticipate transition planning to grow as an area of focus for banks. This is a response both to regulatory requirements – EBA guidelines for the management of ESG risks released in January 2025 requires banks to develop transition plans – and as a growing element of risk management and due diligence as banks seek to evaluate their corporate clients’ strategies for managing transition risk. There is also an opportunity here for banks to support the financing of clients’ transition strategies, including through labelled bonds and loans.
William Attwell is Director of Climate Research at Sustainable Fitch.
This article will feature in the next edition of OMFIF’s SPI Journal, publishing 15 July.
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