Climate and environmental risks: compliance or competitive advantage?

Climate and environmental risks are no longer something financial institutions just talk about. It is something supervisors’ price into capital, governance and strategy as the risk has crossed a regulatory threshold.

At the NFR group, we help financial institutions build robust, defensible climate and environmental risk frameworks that prepares for supervisory scrutiny and support sound capital and risk decisions. The focus is on practical implementation: designing and embedding climate risk capabilities that work in real governance, risk and capital processes.

European banking supervision is moving ESG, in particular climate and environmental risk, from a “nice-to-have” sustainability narrative into core prudential risk management.

European banking supervision is moving ESG, in particular climate and environmental risk, from a “nice-to-have” sustainability narrative into core prudential risk management. This shift has been formalised by the EBA through its Guidelines on the management of ESG risks (EBA/GL/2025/01) and its Guidelines on Environmental Scenario Analysis (EBA/GL/2025/04). Together, these frameworks establish minimum standards and reference methodologies for how institutions identify, measure, manage and monitor ESG risks, with a clear supervisory focus on climate and environmental drivers.

Under the EBA framework, compliance is not about producing an ESG report. It is about demonstrating that climate and environmental risk are embedded in governance, risk management and capital and liquidity adequacy processes in a way that is consistent, repeatable and defensible. The ESG risk management guidelines apply from 11 January 2026, with an extended timeline to 11 January 2027 for small and non-complex institutions.

The guidelines explicitly link ESG risk management to prudential governance expectations. Institutions must demonstrate clear ownership and oversight across the three lines of defence, including independent review by internal audit of ESG risk frameworks and governance arrangements. In practice, supervisors expect climate and environmental risk to be treated like any other financial risk driver: governed, controlled, challenged and documented — not merely described.

Our Core Offerings

Material climate and environmental risk The identification, assessment and documentation of how physical and transition climate risk affect the business model, balance sheet and risk profile are addressed, including the development of robust materiality assessments that meet supervisory expectations and withstand scrutiny.

Core risk management frameworks Climate and environmental risk is integrated into existing prudential structures, including ICAAP, risk appetite frameworks, policies and governance, ensuring they are managed consistently with credit, market, liquidity and operational risks.

Climate stress testing for capital and strategy Climate stress testing and scenario analysis are designed to go beyond disclosure, translating climate pathways into quantifiable financial impacts and using the results to inform capital planning, strategic decisions and risk limits.

Board and senior management accountability Clear board and executive accountability is established, with climate risk embedded into strategic decision-making, risk oversight and governance in line with supervisory expectation.

Supervisory readiness and enforcement resilience Readiness against supervisory expectations is assessed, gaps are identified and prioritised remediation actions are defined, supporting effective supervisory engagement and enabling a transition from expectation-setting to enforceable compliance.

Why NFR?

NFR helps financial institutions build robust, defensible climate and environmental risk frameworks that prepares for supervisory scrutiny and support sound capital and risk decisions. The focus is on practical implementation: designing and embedding climate risk capabilities that work in real governance, risk and capital processes.

With deep experience at the intersection of prudential regulation and banking supervision, NFR understands not only what supervisors expect, but how they assess, challenge and enforce those expectations. This enables the translation of complex regulatory requirements into clear, proportionate and workable solutions tailored to each institution’s size, risk profile and operating model.

NFR’s work is grounded in a structured, methodical approach aligned with supervisory practices and underpinned by a strong understanding of core prudential frameworks, including ICAAP, governance and stress testing. Continuous monitoring of regulatory developments and supervisory priorities ensures institutions stay ahead of evolving expectations.

The result is not just compliance, but confidence: frameworks that institutions are prepared to defend under supervisory review and rely on for capital and strategic decisions.