Circular Letter No. CC/2025/00000036 on ESG Risk Management

Circular Letter No. CC/2025/00000036 Sent to: Credit Institutions and Financial Societies. Mod. 40000375/T – 01/14 Subject: Guidelines of the European Banking Authority on the management of environmental, social and governance (ESG) risks (EBA/GL/2025/01)

Climate change and ecosystem degradation, as well as the economic policy measures associated with these phenomena, affect the functioning of the economy in which financial institutions operate, thereby generating financial risks for credit institutions supervised by the Bank of Portugal. Environmental risks and, more broadly, environmental, social and governance matters (or "ESG") thus constitute a source of risk for the economy and the financial system.

In this context, in April 2021[1], the Bank of Portugal defined prudential supervisory expectations regarding the identification and management of climate and environmental risks for less significant credit institutions. The effective implementation of these supervisory expectations constitutes a central element to ensure the resilience and sustainability of the business model of credit institutions in the medium to long term.

Subsequently, Directive (EU) 2024/1619 (Capital Requirements Directive VI, or CRD VI)[2] and Regulation (EU) 2024/1623 (Capital Requirements Regulation III, or CRR III)[3] determined new regulatory requirements regarding ESG risks. The changes introduced aim at greater integration of ESG considerations into the risk management policies and prudential framework of credit institutions. Briefly, and among others, this regulation (i) requires that the strategies and processes for assessing the adequacy of internal capital and the internal governance systems of credit institutions consider the impacts of ESG risk factors in the short, medium and long term, (ii) establishes that credit institutions must have specific plans to address ESG risks (commonly referred to as transition plans), with emphasis on the environmental component ("E"), and (iii) provides, at the supervisory level, the assessment of ESG risks within the framework of the annual supervisory review and evaluation process ("SREP").

In compliance with the mandate provided for in Article 87-A(5) of CRD VI, the EBA prepared the Guidelines on the management of ESG risks, EBA/GL/2025/01 ("Guidelines"), published on January 9, 2025.[4] These Guidelines (i) address the process of ESG risk management of supervised institutions in the broader context of their risk management framework and (ii) specify the provisions on governance and risk management of institutions to address the impacts of ESG risk factors, with special emphasis on environmental risk factors.[5] Specifically, the guidelines define:

a) minimum standards and reference methodologies for the identification, assessment, management and monitoring of ESG risks; (b) qualitative and quantitative criteria applicable to the assessment of the impact of ESG risks on the risk profile and solvency of institutions in the short, medium and long term; and (c) the content of the plans that the administrative body should draw up in order to monitor and address the financial risks arising from ESG factors.

The Guidelines consider the principle of proportionality, allowing institutions to adapt their ESG risk management approaches according to their size, complexity and the nature of their operations and exposures, with smaller and less complex institutions being able to adopt simplified procedures for the identification and management of ESG risks. However, all institutions are required to carry out a materiality assessment of the impacts of ESG risks as a prior step, to determine the most appropriate risk management strategy and the identification of priority areas of action.

These Guidelines complement other (i) regulations of the Bank of Portugal, namely those regarding the definition of supervisory expectations on climate and environmental risks; and (ii) EBA guidelines, namely and among others, on lending and monitoring, on governance matters and on scenario analysis.[6]

These Guidelines are applicable (i) from January 11, 2026, to less significant credit institutions that are not small and non-complex institutions, and (ii) no later than from January 11, 2027, to small and non-complex institutions.[7]

The Bank of Portugal emphasizes the importance of less significant credit institutions following the provisions of the Guidelines, which must be followed and applied in the context of current legislation and regulation and, in particular, in complement to the provisions contained in the General Regime of Credit Institutions and Financial Societies regarding the management of material risks to which institutions are or may be subject. It is further informed that the Bank of Portugal communicated to the EBA its intention to comply with these Guidelines, so that the practices defined therein are taken into account in the exercise of supervisory activity.

[1] Circular Letter No. CC/2021/00000010 | Bank of Portugal. [2] Directive (EU) 2024/1619 of the European Parliament and of the Council of 31 May 2024 amending Directive 2013/36/EU as regards supervisory powers, sanctions, third-country branches and environmental, social and governance risks. [3] Regulation - EU - 2024/1623 - EN - EUR-Lex. [4] The EBA publishes its final Guidelines on the management of ESG risks | European Banking Authority.

Mod. 40000375/T – 01/14 [5] In accordance with Article 87-A(1) and Article 74 of Directive 2013/36/EU. [6] Guidelines on lending and monitoring, Guidelines on governance, and Guidelines on scenario analysis of the EBA. [7] Subject to the completion of the transposition of the relevant amendments to Directive 2013/36/EU by Directive (EU) 2024/1619.