Probability & Partners: ESG on the horizon - updated EU regulatory landscape
Door Gerd-Jan van Wiggen, Partner, en Yusi Wang, Senior Risk Consultant, beiden bij Probability & Partners
The regulatory landscape for ESG risk management in Europe is progressing from ambition to execution. With the Dutch Central Bank (DNB) publishing its Guide for Climate and Natural Risk Management 2025, and European supervisors jointly advancing ESG stress testing frameworks, climate and nature risks are no longer something financial institutions can put on the sidelines. These developments do not just expand the compliance checklist, they redefine what good governance, credible transition planning, and future-proof risk management should look like across the financial sector.
DNB’s Enhanced Guidance: More Than Climate Alone
The DNB’s updated guide applies to non-bank institutions such as insurers, pension funds, investment firms, and payment institutions. While there is no fixed implementation deadline, institutions are expected to integrate the guidance into their annual risk assessments and prepare for the supervisory review going forward.
Some relevant enhancements reflect the regulator’s sharpened priorities:
- Nature and biodiversity risk integration: DNB explicitly treats nature-related risks as a subset of ESG risks, providing practical methods to identify and mitigate them alongside climate risk. The relationship between climate and nature risks with social risks should be assessed. Furthermore, how these risks impact financial risks should be taken into account.
- Materiality analysis sophistication: Institutions must differentiate between physical and transition risks across varying time horizons, using both qualitative and quantitative approaches, and assess how these translate into prudential risk domains, such as credit, market, reputational and strategic risk.
- Governance competence and accountability: Boards and supervisory bodies are expected to build explicit ESG knowledge and embed it in policies, supported by regular training.
- Transition plan expectations: Expanded guidance now covers Paris alignment, net-zero strategies, engagement/exclusion policies, and benchmarks.
- Regulatory alignment: The guide reflects the latest EU-level legislative initiatives, from CSRD to CSDDD.
Together, these changes show DNB is not just setting technical expectations but pressing institutions toward credible, forward-looking ESG integration.
The European Supervisory Harmonization : ESG in Supervisory Stress Testing
Beyond the Netherlands, the EBA together with EIOPA and ESMA, has launched consultations on joint guidelines for integrating ESG risks into supervisory stress testing. Although principle-based and primarily addressed to the competent authorities, these guidelines are highly relevant for institutions.
They establish a framework that covers governance, human resources, data quality, and scenario design, signaling that incorporating ESG in supervisory stress testing will become a structural element of prudential supervision under the CRD and Solvency II. For firms, the lesson is clear: preparation cannot wait until methodologies are finalized. Building the governance capacity and data infrastructure today will be critical to meeting supervisory expectations tomorrow.
From Regulation to Resilience
To stay ahead, institutions should elevate ESG oversight at the board level, invest in reliable data to underpin stress testing, and integrate nature-related risks alongside climate considerations. Climate transition plans must move from high-level ambition to concrete, measurable strategies, while governance, processes, and systems should already be preparing for forthcoming supervisory expectations.
ESG risks are being mainstreamed into prudential supervision. Yet despite this clear supervisory shift, efforts to address climate risks are still often perceived as costly in the short term, especially in today’s turbulent economic environment and amid rising geopolitical tensions. This perception leads some institutions to settle for quick fixes or even withdraw their commitments to climate targets. Those that approach these developments merely as regulatory box-ticking will fall behind. By contrast, institutions that treat them as an opportunity, strengthen governance, sharpen data capabilities, and develop credible transition strategies will not only meet supervisory expectations but also avoid the larger financial and reputational costs of inaction, just as past crises have shown. In doing so, they will build both resilience and trust in a market increasingly shaped by climate and nature dependencies.
Concluding, climate, nature and ESG risks are increasing. Whether it poses a big risk or not for individual financial institutions, it is important to recognize these risks and embed them in risk management frameworks. The recent publications provided by DNB and the European Supervisory Authorities provide a great foundation for this.