Asset owners should encourage European banks to grasp a golden opportunity for resilience, transformation and competitive advantage, says Michael Horvath, Sustainability Leader at PwC Luxembourg.
In early October 2025, the Net Zero Banking Alliance (NZBA) – a coalition that once united more than a hundred banks under a shared commitment to align lending portfolios with net zero emissions – ceased operations following several high-profile withdrawals. This dissolution seemed to signal a retreat from collective climate action during an extended period of political pressure from within and outside the European Union (EU).
Alongside the backlash against net zero coalitions in the US, the internal pressure was mostly related to the relevance, appropriateness and breadth of the EU’s sustainability reporting framework, most notably the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). These two landmark directives were to serve as core providers of decision-grade sustainability information, which would be exactly what corporate lenders would need to assess borrower resilience, transition readiness, and value-chain risks. Yet, both have been watered down since then.
Irrespective of voluntary commitments or political headwinds, Europe’s banks must take matters into their own hands. For European banks, embedding sustainability into corporate lending is increasingly a core competency. It supports basic risk management and helps institutions steer portfolios through physical risks (such as extreme weather) and transition risks (such as policy, technology and market shifts). Crucially, it extends beyond climate to other potentially material topics – from nature and water stress to supply-chain dependencies.
Appropriately embedding sustainability in the lending business is crucial for banks to sustain long-term resilience and growth – and asset owners who directly and indirectly own stakes in the European banking industry are taking note. Even if banks might not see sustainability as a pressing issue, both the European Central Bank (ECB) and the European Banking Authority (EBA) have communicated throughout 2025 the importance for banks to manage sustainability-related risks. The supervisors are aware how important sustainability is for the ongoing health and competitiveness of the European banking sector, irrespective of short- to mid-term political thinking.
Yet the gap is still visible. Climate risk has been on the supervisory agenda for years, but supervisors continue to point to uneven integration across strategy, credit assessment, pricing and monitoring. The direction of travel is clear: sustainability needs to be treated like any other risk driver, with clear governance, usable data and disciplined decision-making.
Regulatory sticks, market carrots
Corporate lending is a key mechanism through which the transition to a low-carbon economy can be accelerated. Indeed, banks’ lending decisions can influence entire industries and shape capital flows toward sustainable practices – and in the context of a post-energy crisis Europe in a fragmented geopolitical landscape, matters such as renewable energy and energy efficiency are vital.
But sustainability-focused corporate lending goes well beyond merely promoting a low-carbon economy. Indeed, embedding ESG criteria into credit assessments and portfolio strategies is necessary for sound risk management. Climate-related and environmental factors can act as drivers of traditional risk types – including credit risk – and supervisors expect banks to identify, measure, manage and monitor them accordingly.
In Europe, the prudential framework and supervisory expectations are pushing banks to move from principle to practice. The revised Capital Requirements Directive (CRD VI) strengthens expectations around how banks address financial risks arising from ESG factors, and the EBA’s ‘Guidelines on the management of ESG risks’ start applying from January 2026. Supervisors have reinforced these expectations through reviews, stress testing and follow-up actions – including the use of enforcement tools when banks missed climate risk management deadlines set through supervisory decisions.
At the same time, there are market incentives, and sustainability-linked corporate lending can be an engine of growth. Green and sustainability-linked loans offer competitive advantages, reduce financing costs for clients, and can open new revenue streams. To do so, corporate lending decisions must integrate sustainability risk within traditional lending models, and banks need to translate ESG risk into risk appetite, capital allocation decisions, credit assessments, risk-based pricing and ongoing monitoring including stress testing. Finally, sustainability risk does not stop at the bank-borrower boundary. Insurance market dynamics – including availability and pricing for physical climate risks – can affect borrower cash flows, asset values and collateral resilience. These dynamics are increasingly relevant inputs into credit judgement.
Industry- and regulator-led initiatives such as the Climate Financial Risk Forum (CFRF) in the UK can come in handy here as the practical guidance issued can help banks in integrating climate and environmental considerations in risk management, scenario analysis and lending.
Yet, such a shift would mean questioning legacy operating models – no mean feat for all banks – alongside investing in data and technology for sustainability risk quantification. Without these steps, banks risk overreacting (or underreacting) to sustainability risks, undermining both the profitability of their corporate lending activities and their credibility.
The role of asset owners: influence through capital allocation
Asset owners such as pension funds, sovereign wealth funds, and insurance companies, control trillions in assets and sit at the top of the investment chain. Their influence over banks can be profound and can help push corporate lending decisions to ensure sustainability considerations are adequately incorporated into the organisation.
For starters, asset owners can demand robust sustainability stewardship from their asset managers or from the banks directly, requiring them to demonstrate credible climate strategies and threaten to downgrade or terminate the mandate should the demands go unheeded. Tools such as stewardship codes would come in handy in such situations.
We’re already seeing sustainability-driven capital reallocations by asset owners in Europe, as certain large pension funds started severing their ties with their asset managers, due to the latter’s failure to consider climate risks, shifting towards managers who have strong ESG bona fides.
As such, asset owners should not shy away from the proverbial stick. They should move beyond aggregated ESG ratings and leverage granular sustainability data to push for measurable outcomes from the banks in their portfolios, such as clearly-defined and measurable transition plans and climate risk disclosures.
Beyond voluntary frameworks and towards embedded action
If voluntary alliances already suffered from an image problem back when COP26 in Glasgow took place, the collapse of NZBA should serve as a wake-up call that such alliances alone cannot deliver the needed systemic changes.
It is true that if European banks advance climate and sustainability integration – as mandated by the European regulators – while their American rivals do not or are not required to do, they may face near-term implementation costs. Extending credit to a counterparty remains in the US as well as in the EU with respect to sustainability criteria the decision of the respective bank. No direct regulatory consequences, such as the holding of increased capital buffers, are attached. Limitations for providing credit to counterparties active in different sectors or with respect to certain behaviours are due to exclusion sets developed in-house by the bank and not due to regulatory provisions.
Europe is widely recognised as the fastest-warming continent, which makes the case for a long-term view even more compelling. Banks that build sustainable corporate lending capabilities from the bottom up – sector policies, value-chain understanding, stronger credit processes and better data – can improve resilience and reduce the risk of sudden repricing when risks crystallise.
Ultimately, doing so constitutes an opportunity to redefine the corporate banking landscape in the years to come. By integrating sustainability into the very fabric of corporate lending decisions, and by building on the support and influence of asset owners, European banks can turn this moment of sustainability recalibration into a catalyst for lasting change and long-term business transformation.
Asset owners should encourage European banks to grasp a golden opportunity for resilience, transformation and competitive advantage, says Michael Horvath, Sustainability Leader at PwC Luxembourg.
In early October 2025, the Net Zero Banking Alliance (NZBA) – a coalition that once united more than a hundred banks under a shared commitment to align lending portfolios with net zero emissions – ceased operations following several high-profile withdrawals. This dissolution seemed to signal a retreat from collective climate action during an extended period of political pressure from within and outside the European Union (EU).
Alongside the backlash against net zero coalitions in the US, the internal pressure was mostly related to the relevance, appropriateness and breadth of the EU’s sustainability reporting framework, most notably the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). These two landmark directives were to serve as core providers of decision-grade sustainability information, which would be exactly what corporate lenders would need to assess borrower resilience, transition readiness, and value-chain risks. Yet, both have been watered down since then.
Irrespective of voluntary commitments or political headwinds, Europe’s banks must take matters into their own hands. For European banks, embedding sustainability into corporate lending is increasingly a core competency. It supports basic risk management and helps institutions steer portfolios through physical risks (such as extreme weather) and transition risks (such as policy, technology and market shifts). Crucially, it extends beyond climate to other potentially material topics – from nature and water stress to supply-chain dependencies.
Appropriately embedding sustainability in the lending business is crucial for banks to sustain long-term resilience and growth – and asset owners who directly and indirectly own stakes in the European banking industry are taking note. Even if banks might not see sustainability as a pressing issue, both the European Central Bank (ECB) and the European Banking Authority (EBA) have communicated throughout 2025 the importance for banks to manage sustainability-related risks. The supervisors are aware how important sustainability is for the ongoing health and competitiveness of the European banking sector, irrespective of short- to mid-term political thinking.
Yet the gap is still visible. Climate risk has been on the supervisory agenda for years, but supervisors continue to point to uneven integration across strategy, credit assessment, pricing and monitoring. The direction of travel is clear: sustainability needs to be treated like any other risk driver, with clear governance, usable data and disciplined decision-making.
Regulatory sticks, market carrots
Corporate lending is a key mechanism through which the transition to a low-carbon economy can be accelerated. Indeed, banks’ lending decisions can influence entire industries and shape capital flows toward sustainable practices – and in the context of a post-energy crisis Europe in a fragmented geopolitical landscape, matters such as renewable energy and energy efficiency are vital.
But sustainability-focused corporate lending goes well beyond merely promoting a low-carbon economy. Indeed, embedding ESG criteria into credit assessments and portfolio strategies is necessary for sound risk management. Climate-related and environmental factors can act as drivers of traditional risk types – including credit risk – and supervisors expect banks to identify, measure, manage and monitor them accordingly.
In Europe, the prudential framework and supervisory expectations are pushing banks to move from principle to practice. The revised Capital Requirements Directive (CRD VI) strengthens expectations around how banks address financial risks arising from ESG factors, and the EBA’s ‘Guidelines on the management of ESG risks’ start applying from January 2026. Supervisors have reinforced these expectations through reviews, stress testing and follow-up actions – including the use of enforcement tools when banks missed climate risk management deadlines set through supervisory decisions.
At the same time, there are market incentives, and sustainability-linked corporate lending can be an engine of growth. Green and sustainability-linked loans offer competitive advantages, reduce financing costs for clients, and can open new revenue streams. To do so, corporate lending decisions must integrate sustainability risk within traditional lending models, and banks need to translate ESG risk into risk appetite, capital allocation decisions, credit assessments, risk-based pricing and ongoing monitoring including stress testing. Finally, sustainability risk does not stop at the bank-borrower boundary. Insurance market dynamics – including availability and pricing for physical climate risks – can affect borrower cash flows, asset values and collateral resilience. These dynamics are increasingly relevant inputs into credit judgement.
Industry- and regulator-led initiatives such as the Climate Financial Risk Forum (CFRF) in the UK can come in handy here as the practical guidance issued can help banks in integrating climate and environmental considerations in risk management, scenario analysis and lending.
Yet, such a shift would mean questioning legacy operating models – no mean feat for all banks – alongside investing in data and technology for sustainability risk quantification. Without these steps, banks risk overreacting (or underreacting) to sustainability risks, undermining both the profitability of their corporate lending activities and their credibility.
The role of asset owners: influence through capital allocation
Asset owners such as pension funds, sovereign wealth funds, and insurance companies, control trillions in assets and sit at the top of the investment chain. Their influence over banks can be profound and can help push corporate lending decisions to ensure sustainability considerations are adequately incorporated into the organisation.
For starters, asset owners can demand robust sustainability stewardship from their asset managers or from the banks directly, requiring them to demonstrate credible climate strategies and threaten to downgrade or terminate the mandate should the demands go unheeded. Tools such as stewardship codes would come in handy in such situations.
We’re already seeing sustainability-driven capital reallocations by asset owners in Europe, as certain large pension funds started severing their ties with their asset managers, due to the latter’s failure to consider climate risks, shifting towards managers who have strong ESG bona fides.
As such, asset owners should not shy away from the proverbial stick. They should move beyond aggregated ESG ratings and leverage granular sustainability data to push for measurable outcomes from the banks in their portfolios, such as clearly-defined and measurable transition plans and climate risk disclosures.
Beyond voluntary frameworks and towards embedded action
If voluntary alliances already suffered from an image problem back when COP26 in Glasgow took place, the collapse of NZBA should serve as a wake-up call that such alliances alone cannot deliver the needed systemic changes.
It is true that if European banks advance climate and sustainability integration – as mandated by the European regulators – while their American rivals do not or are not required to do, they may face near-term implementation costs. Extending credit to a counterparty remains in the US as well as in the EU with respect to sustainability criteria the decision of the respective bank. No direct regulatory consequences, such as the holding of increased capital buffers, are attached. Limitations for providing credit to counterparties active in different sectors or with respect to certain behaviours are due to exclusion sets developed in-house by the bank and not due to regulatory provisions.
Europe is widely recognised as the fastest-warming continent, which makes the case for a long-term view even more compelling. Banks that build sustainable corporate lending capabilities from the bottom up – sector policies, value-chain understanding, stronger credit processes and better data – can improve resilience and reduce the risk of sudden repricing when risks crystallise.
Ultimately, doing so constitutes an opportunity to redefine the corporate banking landscape in the years to come. By integrating sustainability into the very fabric of corporate lending decisions, and by building on the support and influence of asset owners, European banks can turn this moment of sustainability recalibration into a catalyst for lasting change and long-term business transformation.
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