From strategy to action: how Prudential Transition Plans help steer ESG risks in banking

Defining the scope of the Prudential Transition Plan (PTP) remains a significant challenge for many banks. While the official deadline of January 2026 for all banks, except small or non-complex institutions (SNCI), is stipulated in the EBA guideline⁶, it is widely regarded as ambitious — particularly for medium-sized banks. Some significant institutions in EU are already engaging with the ECB to explore phased submissions of the PTP between March and June 2026, whereas other banks continue to target for January 2026. In addition, multiple significant institutions have bilateral JST-meetings planned in January-February 2026 to present and discuss (the first iteration of) their PTP. 

Achieving consistency across multiple regulatory frameworks — EBA Guidelines, CSRD, Pillar 3, CRR3, and CRD VI — is proving complex. The EU Omnibus adds further challenges, particularly in relation to client-related data requirements. Institutions must ensure that the PTP serves as an overarching tool for alignment between business strategy, risk management, and sustainability objectives, while maintaining coherence with disclosure requirements as stipulated by CRD, CSRD, and Pillar 3.

Banks shall perform an assessment to identify gaps between their current practices and EBA requirements and/or ECB  expectations in terms of prudential transition planning and reflect as such within the Prudential Transition Plan. This ensures transparency and provides a structured roadmap for implementation and remediation as part of a journey towards an optimal PTP which is fully embedded in the governance and risk management practices of the banks. Remediation activities should be explicitly documented, positioning 2026 as a transition year for implementing corrective measures. This approach ensures transparency and demonstrates proactive compliance.

The PTP is not merely a compliance exercise, it is a strategic instrument covering three time horizons and supporting ESG resilience over a 10-year outlook. Banks shall prioritize:

• Developing a Target Operating Model (TOM) for PTP implementation.
• Ensuring consistency with (public) disclosure requirements.
• Embedding ESG considerations into core business and risk frameworks.
  

When engaging with clients on ESG risk topics, banks need clarity on what falls within their role as a lender of record and what goes beyond, as it is considered unrealistic for banks to solve all major societal issues within the EU. Engagement should be risk-based, focusing on material counterparties. It is considered key to define clear engagement conditions, goals, and escalation criteria, and prioritizing ESG topics where multiple underperforming areas exist.

Regulatory changes such as the EU Omnibus and shifting ESG priorities are making data collection and assessment of clients’ transition plans increasingly complex. Limited availability of reliable information can impair effective engagement and/or the quality thereof.

Institutions should establish minimum requirements for transition risk management, including depth and breadth of expectations. This ensures consistency between business objectives and ESG risk management. We observe a growing trend: institutions prefer dialogue over existing relationships when engagement fails. Providing clients with clear information and actionable steps to reduce risks is becoming the norm.

Leading practice is to at least reach a basic level of interaction with clients, thereby leveraging:

• Due diligence and scenario alignment
• ESG metrics defined by the bank
• CSRD client disclosures (incl. metrics)
• Guide clients on opportunities versus restricting business.
  

As transition planning becomes embedded in risk frameworks, banks face a critical challenge: moving from compliance-driven exercises to strategic integration. The key questions are:

• How can scenario insights and risk metrics guide capital allocation, funding priorities, and strategic decisions?
• How do institutions integrate ESG risk factors into their ICAAP when long-term transition pathways conflict with short-term profitability goals?
• How can banks ensure portfolio-wide coverage and translate plans into client-level actions, especially when the process starts as a regulatory requirement rather than a business imperative?

Leading banks are reframing transition planning as a strategic tool, not a compliance burden. Scenario analysis is central to this shift. It supports capital allocation and funding priorities, enabling banks to test business model resilience under multiple transition pathways. It informs strategic planning, helping institutions to anticipate regulatory developments and market shifts.

ESG risks should be embedded into ICAAP through traditional risk categories, reinforced by scenario-based stress testing. This approach aligns climate strategy with business planning — even when initially driven by regulation — and strengthens the business case for transition.

Coverage must extend beyond climate to all material ESG risks, guided by robust materiality assessments. Leading practices include:

• Sectoral benchmarks and peer learning,
• Portfolio alignment analysis,
• Scenario-driven engagement strategies.

When scenario outcomes reveal tensions between profitability and risk exposure, banks must strike a balance: support clients in their transition while managing ESG risks. This requires clear engagement strategies and explicit agreement on action plans prepared by clients.

Improving data quality and granularity is essential. While the use of proxies is permitted under current guidelines, institutions should progressively reduce their usage and invest in integrated ESG data solutions. The absence of reliable nature-related data, for example, continues to hinder the ability to set meaningful targets for biodiversity and other environmental risks.

ESG data should be embedded across risk management, reporting, and decision-making systems, moving from siloed structures to integrated platforms with cross-functional access and governance.

Position transition planning as a strategic enabler, collect and centralize ESG data for the alignment of climate strategies with business objectives to drive resilience and competitive advantage is key for banks to create a competitive advantage compared to peers.

What governance and incentive mechanisms are most effective in embedding business-led accountability for PTP execution? How can accountability be evidenced or monitored?

Accountability is a sensitive business challenge. Without clear ownership, ESG risk integration quickly becomes a compliance-driven exercise with limited to none (positive) topline impact rather than strategy-led.

Leading Practices includes ESG-linked remuneration to align incentives with transition objectives, cross-functional ownership across risk, finance, and business units, board oversight to ensure strategic alignment, integration into internal controls for consistency and auditability.

Accountability should be embedded in pricing, product design, and capital allocation decisions. This shifts the narrative from compliance to value creation.

Focus on high-level indicators and principles that demonstrate progress will help here:

• Internal reporting and dashboards for transparency,
• Early warning indicators to flag deviations,
• Escalation protocols for timely intervention,
• Audit reviews to validate governance effectiveness.
   

What’s the difference between a Prudential Transition Plan (PTP) and a CSRD Transition Plan (TP) — and why does it matter for banks today?

Both aim to accelerate credible climate transition — but through distinct lenses. One prioritizes financial stability, the other public accountability. Together, they demand an integrated approach that many institutions have yet to master.

Under CRD VI, banks must develop a Prudential Transition Plan (PTP), assessed through the SREP process. Its mandate: ensure robust ESG risk management and safeguard financial stability during the transition.

Key requirements:

• Formal approval by senior management and the board
• Integration into core processes (ICAAP, risk appetite frameworks)
• Dynamic updates as risks evolve
• Annual supervisory review — non-compliance may trigger capital add-ons or qualitative measures
• Primarily internal, with optional partial disclosure (e.g., Pillar 3 ESG section)
  

The CSRD Transition Plan serves a different purpose: market-facing accountability. It articulates how the business model aligns with EU climate goals and appears in annual sustainability reports — subject to investor scrutiny and reputational risk.

Leading Practice is to build one coherent transition planning process that satisfies both regulators, investors and other stakeholders. Align governance, targets, and disclosures to avoid duplication and confusion. Institutions that integrate these frameworks will not only meet compliance requirements but also strengthen strategic resilience.

How to align prudential transition plans between group and subsidiaries? How do non-EU subsidiaries integrate scenarios and methodologies?

As regulatory expectations under CRD VI and EBA Guidelines intensify, banks face a critical challenge: aligning Prudential Transition Plans (PTPs) across complex organizational structures. This is not just a compliance exercise, it’s a test of governance, coordination, and strategic foresight.

For large EU banking groups, the trend is clear: develop a consolidated PTP at Group level, then cascade it into regional, business line, and local breakdowns. This approach ensures consistency in methodology and targets while preserving flexibility for local execution. One overarching plan sets direction and methodology. Subsidiaries remain accountable for execution, adapting actions to local business models and client specifics. Board and senior management oversight should be at both Group and subsidiary levels.

For EU subsidiaries of banks headquartered outside of the EU, the challenge is greater. Although the parent entity is not subject to CRD VI and the corresponding PTP requirement, EU subsidiaries must comply — often requiring an extensive need to educate decision makers at Group on such local EU requirements.

What this means in practice? Subsidiary leadership must articulate why compliance matters, what actions are required, and how these efforts can add strategic value for the Group. Integration of EU-aligned scenarios and methodologies into local risk frameworks — even when Group ICAAP or risk processes differ. Positioning transition planning as a strategic lever, not just a regulatory compliance exercise is key.

Even under proportionality principles, smaller banks face extra effort in terms of:

• Develop a standalone PTP with clear ownership, not conflicting with transition planning methodologies at group level.
• Reflect local business realities and client profiles.

Leading Practice is to treat PTP alignment like ICAAP, considering methodology consistency, local accountability and one integrated planning framework that connects prudential and sustainability objectives, thereby using alignment as an opportunity to strengthen the group-wide ESG risk governance.

Applying proportionality does not mean lowering the bar — it means tailoring the Prudential Transition Plan (PTP) to the size, complexity, and risk profile of the institution.

Even under proportionality, regulators expect a clear plan of action with defined ownership and alignment to local business realities and client needs. Avoid generic templates; substance matters.

Consolidated plans at Group level should cascade into regional and local breakdowns, ensuring relevance without duplication. Governance must clarify who owns execution locally. Proportionality is about focus and relevance, not minimal effort.

Risk Appetite Statements (RAS) often rely on quantitative metrics — but ESG transition scenarios may be qualitative or directional.

Leading practices:

• Translate qualitative insights into proxy indicators (e.g., exposure to high-carbon sectors, share of green financing).
• Use narrative thresholds: define what “acceptable” vs. “unacceptable” looks like under different transition pathways.
• Combine qualitative scenarios with stress-testing assumptions to set directional targets (e.g., portfolio alignment trajectory).
• Ensure improvement overtime, start usage of sensitivity analysis and quantitative metrics.
  

When the parent ICAAP concludes that ESG risks are immaterial, EU subsidiaries still face CRD VI and EBA obligations. Compliance cannot be delegated — subsidiaries must demonstrate their own assessment.

Leading practices:

• Even if the Group methodology defines ESG as immaterial, the subsidiary must apply local regulatory standards and document the ESG risk identification and assessment process.
• Include a detailed description of the assessment, the considerations applied, and the assumptions that led to the immateriality conclusion. Regulators expect evidence, not assertions.
• Embed ESG risk thinking into Group frameworks over time. This creates consistency, strengthens governance, and positions the institution for future regulatory and market expectations.
  
  

Banks that treat the PTP predominantly as a compliance or paper exercise will fail to meet supervisory expectations. Those that embed it into governance, capital strategy, and client engagement will lead the way and create competitive advantage.

The clock is ticking. By 2026, banks will either embed Prudential Transition Plans into the core of their business — or risk being left behind. It’s a strategic stress test for governance, capital allocation, and client engagement.

Practical actions to lead transition

1. Run a brutal gap analysis now. Identify where your institution falls short against EBA expectations — and develop a remediation roadmap.
   
   
2. Break the silos. Integrate prudential and sustainability objectives across ICAAP, CSRD, and Pillar 3. If your risk and finance teams aren’t talking, you’re already behind.
   
   
3. Put skin in the game. Link ESG targets to remuneration. If leadership and business leader incentives aren’t tied to transition success, accountability is fiction.
   
   
4. Invest in data or lose credibility. Proxies are a temporary crutch. Build ESG data platforms that inform pricing, capital allocation, and client engagement.
   
   
5. Start dialog. Stop pretending dialogue is non-optional. Define minimum expectations for clients, give more information — and act when transition plans are unrealistic.