EXECUTIVE SUMMARY
A prudential transition plan should inform lending, capital and liquidity decisions. Start with material exposures and test whether assessed risks influence credit terms, collateral assumptions, limits and monitoring. Connect the work across risk, finance, treasury and lending, with clear responsibilities and board challenge. Distinguish short-term stress tests from longer-term planning, document data limitations and examine liquidity effects alongside credit losses. Judge the plan by the decisions and follow-up actions it supports, rather than its approval alone.
That means connecting climate risk to lending, portfolio strategy, capital and liquidity. It also means being honest about uncertainty: what the bank knows, where the data is incomplete and which assumptions could materially change the assessment.
Start with the decisions that matter
We recommend beginning with the bank’s material exposures. Identify where transition risks could affect borrowers’ ability to repay, the value of collateral or the resilience of the business model. Then agree what the review needs to establish, who will contribute and how unresolved issues will reach the right decision-makers.
This gives the work a practical purpose from the outset. A review of a property portfolio, for example, should help the bank understand how changing energy requirements could affect rental income, refurbishment costs and asset values. Those findings can then inform credit policy, monitoring and individual lending decisions.
Keep corporate and prudential obligations distinct
The removal of the CSDDD climate-transition-plan obligation under Directive (EU) 2026/470 changes the corporate framework. Banks’ prudential responsibilities remain separate. The absence of a mandatory corporate plan does not, by itself, tell a lender whether an exposure is sound. Council explanation of the amendments.
Under the CRD VI framework, banks’ plans address financial risks arising from ESG factors over short, medium and long horizons. The EBA Guidelines on ESG risk management apply from 11 January 2026, with small and non-complex institutions covered by 11 January 2027 at the latest. EBA Guidelines.
In practice, banks need information proportionate to the risks they are assessing. A counterparty’s transition plan can be valuable evidence, but its usefulness depends on the assumptions, financing and actions behind it.
We suggest testing three areas in particular.
First, examine the claims attached to the financing. A green or transition label does not establish the quality of an exposure. Legal and compliance teams should be able to explain how material sustainability claims relate to the product’s terms, the financing provided and the supporting evidence.
Second, consider how quickly risk could change. A regulatory change affecting a building’s permitted use or rental income could reduce its value before the borrower defaults. The assessment should consider both the likelihood of default and the potential loss if it occurs, including their interaction where material. Any assumed loss needs to reflect the asset, jurisdiction and scenario.
Third, check whether the people originating business can use the plan. If lending teams have no clear way to apply its findings, the bank needs to address responsibilities, approval controls and incentives.
Choose a manageable scope
A focused review of the most exposed portfolios can be a sensible starting point. It allows the bank to test its approach, identify missing information and establish responsibilities before extending the work.
The limitation is that a narrow review may miss dependencies elsewhere. Shared counterparties, common data weaknesses or links between lending and funding can justify a broader assessment.
We would favour a wider scope where the same weakness appears across several teams or portfolios. Where the issue is contained, a focused review with clear criteria for expansion may be more useful. The scope should follow the risk and the decisions the bank needs to make.
Bring the plan into everyday risk management
Three areas deserve particular attention.
Credit decisions. The credit file should explain how assessed transition risk influenced the decision. Depending on the exposure, that might mean changes to limits, collateral, maturity, pricing, covenants or monitoring.
Standard terms may still be appropriate. The important point is to record why. A plan’s effectiveness cannot be judged simply by counting declined loans or margin increases.
Contractual measures also need to be workable. Before introducing a covenant or pricing adjustment, establish what will be measured, whether the information is reliable and what happens if the condition is breached.
Scenario analysis. The assumptions should suit the question being asked. Testing resilience to a near-term shock serves a different purpose from assessing whether a longer-term portfolio strategy is financially feasible.
The EBA environmental scenario-analysis Guidelines, applicable from 1 January 2027, distinguish stress testing from longer-term resilience analysis. For stress testing, they provide for a constant balance-sheet approach, consideration of significant approved portfolio changes and a fully dynamic approach as a complement. EBA scenario-analysis Guidelines.
For strategic planning, examine the financial implications of the changes the bank intends to make. If exposures are expected to shift between sectors, document the assumptions about revenue, risk and implementation. Make the limitations visible alongside the results.
Liquidity. Transition planning should also inform the bank’s internal liquidity adequacy assessment process, or ILAAP, alongside its capital assessment through ICAAP.
This has become more concrete during 2026. The ECB introduced climate factors on 15 June 2026 for certain corporate bonds used as Eurosystem collateral. These can reduce the borrowing value assigned to affected assets. Treasury should establish whether the bank holds or mobilises affected securities and what that means for available funding. The measure does not impose a blanket adjustment on every loan or property in the bank’s collateral pool.
Keep the different channels clear. Loan collateral, liquid assets held by the bank and collateral eligible for Eurosystem operations have different valuation and eligibility rules. Assess how the relevant scenario affects each, and consider potential funding outflows where reputational concerns could influence depositor behaviour. Any such assumption should have an evidential basis.
Give people clear responsibilities
We recommend that the chief risk officer coordinates the work across risk, finance, treasury and lending, with sustainability, legal and compliance contributing their expertise. Management is responsible for implementation. The board oversees direction and material departures from risk appetite.
Board discussion should examine whether the plan’s assumptions are credible. Are the targets feasible? How reliable are the emissions data? What happens if a counterparty’s investment programme is delayed? Where does the strategy depend on technology, policy or financing that remains uncertain?
Meeting records should capture the questions raised, management’s response and the follow-up agreed. This makes it possible to see how oversight influenced the plan.
Governance weaknesses may affect the supervisory assessment, including Pillar 2 requirements, while stress-test results also inform Pillar 2 guidance. The outcome depends on the institution’s risks, controls and supervisory assessment. A gap in a checklist does not automatically determine a capital add-on.
Keep the evidence close to the decision
For boards and chief risk officers, we suggest five questions:
What decisions has the plan informed? Show how it affected material exposures, terms, limits or monitoring, including the reasons for accepting a risk.
Can we rely on the data? Explain its sources, quality controls and limitations, including those of manual processes.
Are the actions proportionate? Connect engagement, monitoring and contractual measures to the assessed risks, with clear escalation triggers.
Have we considered liquidity? Examine the relevant effects on collateral, funding and potential outflows.
Can we support our claims? Make sure legal and compliance can trace material sustainability statements to evidence and contractual commitments.
Where an answer reveals a material gap, assign an owner, agree the action and set a review date. Revisit the assessment before significant credit-policy or portfolio decisions, and when exposures, data or assumptions change.
A useful transition plan gives people a shared basis for making these judgements. Its value lies in helping the bank understand the risks it is taking, explain its choices and act when the evidence changes.