A dilemma at the heart of the transition

Environmental, Social, and Governance (ESG) criteria have become a central issue for banks today. Yet, their role has never seemed more uncertain. In an international climate marked by the hardening of political debates and the withdrawal of key players from certain climate coalitions, ESG has turned into a subject of controversy – sometimes used as a symbol of constraints on economic freedoms.

In this troubled context, European banks face a strategic dilemma. Should they limit themselves to meeting prudential and regulatory obligations, which grow stricter year after year, reducing ESG to a mere compliance exercise? Or should they, on the contrary, go beyond this framework and make it a structuring axis of their strategy, a tool for risk management, and a lever for competitiveness?

The real difficulty lies precisely in this tension: operating in a volatile and sometimes openly hostile political environment, while still meeting the growing expectations of supervisors, clients, investors, and society at large. The challenge for banks, therefore, is not only to meet regulatory obligations, but to determine the level of ambition they want to bring to their ESG policy and, by doing so, the role they wish to play in the ongoing transition.

A contrasting international context

The situation in the U.S. provides a striking illustration. In recent months, several major banks have chosen to withdraw from the Net Zero Banking Alliance, fearing exposure to accusations of collusion or the risk of political backlash in certain U.S. states. In a deeply polarized society, ESG has become an ideological battlefield, to the point where some jurisdictions now prohibit their public institutions from working with banks deemed “too green.”

In contrast, Europe has taken the opposite path. Here, far from retreating, regulators have steadily strengthened requirements related to ESG risk management. This divergence illustrates just how geopolitical the issue has become. But for European banks, it does not change one undeniable fact: ESG is now embedded at the very heart of prudential frameworks.

ESG as a prudential obligation

Since 2020, the European Central Bank has set clear expectations: integrating ESG risks into strategy, risk appetite, governance, and operational management. The EBA, for its part, has multiplied publications requiring banks to produce standardized reporting – such as the Green Asset Ratio – and to integrate new indicators within the ESG Pillar 3 framework.

Added to this are the EU taxonomy, which defines sustainable activities, and the CSRD directive, in effect since 2024, requiring institutions to publish detailed and verifiable reports. The decisive step came in January 2025, with the publication of the EBA’s final guidelines: starting January 2026, each bank must present a formal ESG transition plan, consistent with its development strategy and fully integrated into its prudential framework (SREP, ICAAP, ILAAP).

It is no longer just about declaring intentions, but about demonstrating the ability to measure, steer, and manage ESG risks with the same rigor as credit or liquidity risks. In other words, for European banks, ESG is no longer a non-financial issue: it is a prudential requirement.

The temptation of the bare minimum

Faced with this growing regulatory burden, the temptation is strong to adopt a minimalist approach: producing the required reports, formalizing a transition plan mainly designed to satisfy supervisors, and stopping there. This stance offers apparent advantages: lower costs, fewer internal conflicts between front office and CSR departments, and reduced media exposure.

But this defensive strategy carries serious limitations. It reduces ESG to an external constraint, without recognizing the risks of a “minimum compliance” approach. It also overlooks the opportunities offered by a more ambitious integration of ESG into banking models.

Why go beyond mere compliance?

Reducing ESG to a compliance exercise would be a strategic mistake. Three key reasons argue for a more ambitious approach.

The first relates to risks themselves. NGFS scenarios show that climate and transition risks are no longer hypothetical: natural disasters, carbon price volatility, GDP losses, asset devaluation in carbon-intensive sectors. Banks that limit themselves to minimal oversight expose themselves to substantial losses, weakened solvency, and higher refinancing costs.

The second concerns credibility. In a world where accusations of greenwashing are multiplying, reputation is a fragile asset. A fragmented or superficial ESG strategy risks undermining client trust, losing investors, and triggering legal sanctions. Conversely, a coherent and demonstrable ESG policy strengthens confidence, reinforces credibility, and protects against reputational risks.

The third relates to opportunities. By supporting clients in their transition, financing sustainable projects, and innovating in green or inclusive products, banks can transform a constraint into a competitive advantage. ESG then becomes a driver of differentiation and growth, in a market where investors and clients seek solutions aligned with their own sustainability goals.

This ambition requires breaking with defensive approaches – sector exclusions, fragmented data collection, limited dialogue with the most exposed counterparties and replacing them with a more proactive, integrated strategy. ESG must be embedded at the very core of banking activity: in credit allocation, through systematic assessments of client maturity; in defining credible transition pathways; in supporting the most vulnerable companies; and in innovating with green and inclusive financing solutions.

All of these levers transform ESG from a regulatory burden into the foundation of a resilient, competitive, and sustainable banking model.