Europe’s financial supervisory bodies have unveiled draft guidelines to embed ESG risks into the mandatory stress tests for banks and insurers across the European Union.
The move, announced by the European Supervisory Authorities (ESAs)—comprising the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA), and the European Insurance and Occupational Pensions Authority (EIOPA)—signals a concerted effort to harmonize supervisory methodologies and strengthen financial resilience against burgeoning non-financial risks.
The ESAs have launched a joint consultation on the proposed joint guidelines on ESG stress testing, inviting feedback
from stakeholders until September 19, 2025. The core tenet of the new proposals is a clear directive for supervisors to
fully integrate ESG factors into the overall stress testing framework and to expand the scope of covered ESG risks as data availability improves.
Acknowledging that ESG stress testing is a relatively nascent field compared to traditional financial risk assessments, the guidance initially prioritizes climate and environmental risks. This includes both physical risks (e.g., extreme weather events) and transition risks (e.g., policy changes impacting carbon-intensive industries). The regulators anticipate a “gradual roll-out” to incorporate “S” (social) and “G” (governance) components as the necessary tools and data become more robust.
The draft guidelines also delve into crucial aspects such as appropriate time horizons for integrated ESG stress tests, scenario design, required levels of data granularity, and materiality assessments.
Supervisors are advised to adopt a risk-based approach to identify which ESG risks are most pertinent to individual financial entities. This involves considering the exposure of assets and liabilities to transition and physical risks, as well as the potential impact of ESG factors on traditional financial risk categories like market, credit, counterparty, underwriting, strategic, operational, and reputational risks.
Crucially, the ESAs emphasize the need for collaboration among banking, insurance, and securities regulators. This inter-agency cooperation is vital to ensure consistency in ESG risk assessment and facilitate data sharing, thereby enabling stress tests to accurately account for interconnections and spillover effects across various financial sectors.
To ensure effective implementation, the proposals also stipulate that supervisors must “ensure that sufficient human and material resources are allocated to the ESG stress testing process.” This includes the allocation of staff with specialized ESG risk expertise, alongside robust data collection and management capabilities.
The ESAs anticipate finalizing these joint guidelines by the end of 2025, with official publication expected in early 2026. This initiative underscores the EU’s proactive stance in addressing climate-related financial risks and fostering a more sustainable and resilient financial system.
