In case you missed it before the summer, a new wave of sustainability requirements is coming for Europe’s banks, large and small alike.
For years, the direction of travel has been clear: ESG disclosure and climate risk assessment were set to become a far bigger part of European banking supervision. What stayed unclear was exactly who would have to report, what they would have to disclose, and when.
That picture is now becoming much clearer. In June, the European Banking Authority (EBA) published the new Pillar 3 ESG disclosure rules. Released as a draft, and pending approval by the European Commission, these new requirements extend the scope to reach every credit institution in the EU and amend existing templates with a first reference date of 31 December 2026. Alongside this, the EBA published its draft methodological note on climate stress testing, with the test itself arriving in 2027.
How we got here: from the Omnibus to the EBA’s no-action letter
The shift begins with the Omnibus Package. In early 2025 the European Commission launched its “Omnibus” package, a broad effort to reduce the cost and duplication of sustainability reporting across the EU. For banks it arrived with mixed signals: the overall direction was lighter-touch, but the detail remained unsettled, nowhere more so than in Pillar 3, the framework requiring banks to publish their risks for the market to see. Anticipating that the ESG rules were about to be rewritten, the European Banking Authority (EBA) issued a no-action letter in August 2025, effectively pausing some ESG Pillar 3 requirements. The sector then settled in to wait.
Stress testing sat in a similar holding pattern. Since the first climate stress tests in 2022, banks had been asking when climate would move from a one-off experiment to a permanent feature of the regular EU-wide exercise.
The third Capital Requirements Regulation (CRR3), the EU’s core prudential rulebook, had already mandated the change: extend ESG risk disclosure from large listed banks to every institution, and add new disclosures on equity and shadow-banking exposures. At the same time, the European Supervisory authorities were quietly moving to harmonize stress-testing methodologies across EU Member States.
On 11 June 2026, the EBA published the methodology for the 2027 EU-wide stress test, introducing a dedicated climate module. Eleven days later, on 22 June, it released its final draft Pillar 3 standards.
EBA Pillar 3 ESG disclosure: what is changing?
As the market-discipline leg of EU banking rules, banks must publish their disclosures so that investors and counterparties can see the risks on their books. The new standards extend those ESG disclosures to every institution, in proportion to size and complexity, sorting banks into three tiers:
| Tier | Definition | Pillar 3 ESG (templates available here) | First reference date |
|---|---|---|---|
| 1 Large listed institutions | G-SIIs,1 O-SIIs,2 and banks with assets ≥€30bn or listed on a regulated market | Full set 3 qualitative tables + 5 quantitative templates, streamlined |
31 Dec 2026 |
| 2 Large non-listed institutions | Large banks not listed on a regulated market | Full set 3 qualitative tables + 5 quantitative templates, streamlined |
31 Dec 2026 |
| 3 Other listed + large subsidiaries | Listed banks below large threshold, or large subsidiaries of major groups | Simplified set 3 qualitative tables + 3 quantitative templates |
31 Dec 2026 |
| 4 SNCI + other non-listed | Small and Non-Complex Institutions and small non-listed banks | Essential set 1 qualitative table + 1 quantitative template: transition risk, physical risk, fossil-fuel exposure |
31 Dec 2027 |
| 1 G-SII (Global Systemically Important Institution): the very largest cross-border banks (e.g. BNP Paribas, Deutsche Bank). 2 O-SII (Other Systemically Important Institution): large domestic banks deemed important to their national system. | |||
| Source: Clarity | |||
The obligations lighten at each step down the tiers. The essential set for the smallest banks, for instance, covers transition risk, physical risk and fossil-fuel exposure. Taxonomy-linked disclosures, including the Green Asset Ratio and the Banking Book Taxonomy Alignment Ratio (BTAR), are removed across all tiers (though may still be required under the Taxonomy regulation), and smaller institutions receive additional support: the EBA will pre-fill and publish their figures in its new Pillar 3 Data Hub, drawing on data they already report.
Whatever the tier, physical risk is part of the disclosure, and it is the part banks most often describe as challenging in conversations with Clarity AI. Banks need to gather the data, interpret it and map it to their counterparties, but also build their own understanding of what it means for a counterparty to be materially exposed to physical risk and to the different hazards mentioned in the templates.
EBA climate stress testing: what changes in 2027?
The EBA’s exercises traditionally centred on the largest, systemically important banks, those above €30 billion in assets, although national supervisors retain discretion to include smaller regional players. The 2027 EU-wide test introduces a dedicated climate module. It functions as a profit-and-loss overlay across two scenarios: a three-year transition path (country-specific carbon-price increases, greenhouse-gas trajectories and falling sector output) and a one-year physical shock modelled on a severe 1-in-100-year river flood.
Notably, the exercise is bottom-up: banks must run these shocks through their own credit models to project climate-adjusted probability of default and loss-given-default. Within that sample, a second threshold decides who gets a lighter load. Banks below €50 billion in assets qualify for “additional proportionality elements,” under which they still complete the full bottom-up exercise, but on simpler reporting terms.
What happens next
Both frameworks are now, in effect, out of the drafters’ hands. On Pillar 3, the consultation has closed and the final draft standards sit with the European Commission, which can still adjust them before adoption. Whatever it decides, the rules have to be aligned and settled ahead of the first reference date of 31 December 2026. The EBA has also kept public disclosure in step with the confidential supervisory reporting templates it consulted on this April, which remain the sharpest preview of what Pillar 3 will ultimately demand: granular detail, down to the energy performance of the property behind a mortgage and physical-risk exposures bucketed by flood severity.
Stress testing is at the same stage. Its methodology is likewise a draft, its consultation has likewise closed, and the open question is how the EBA weighs the stakeholder feedback it received before finalising and launching the exercise next year.
Looking further out, the more significant shift is a trickle-down: small and non-complex institutions sit outside the primary sample for stress testing today, but that is where these stories start, not end. Supervisors, including the European Central Bank and local central banks, are expected to adapt these bottom-up methods as “challenger models” in routine reviews, testing how smaller loan books hold up. Over time the underlying data expectations harden into something permanent, as grouping loans by economic sector and mortgages by the energy-performance rating of the property behind them stops being a one-off exercise and becomes a standing pipeline for every bank, whatever its size.
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