ESA, online the guidelines for integrating ESG risks in the stress tests of banks and insurance companies

The European Supervisory Authorities (EBA, EIOPA and ESMA – the ESAs) have launched a public consultation on their draft Joint Guidelines on ESG stress testing , as required by the Capital Requirements Directive and the Solvency II Directive.

The new Guidelines set out how competent authorities for the banking and insurance sectors should integrate environmental, social and governance (ESG) risks into the conduct of supervisory stress tests. The aim is to harmonise methodologies and practices among supervisory authorities in the banking and insurance sectors, ensure proportionality and improve the effectiveness and efficiency of ESG stress tests.

Presented by the ESA Joint Committee, the draft establishes a common framework for the development of methodologies and standards for ESG-related stress tests across the EU financial system. Specifically, the document provides detailed guidance on the design of stress tests, including consistent ESG scenarios and assessment criteria, as well as specifying the organisational and governance requirements that should be adopted. These include the use of qualified staff with specific ESG expertise, the implementation of effective systems for collecting and managing reliable and high-quality ESG data, as well as the definition of appropriate timeframes to conduct robust and timely scenario analyses .

With the aim of promoting a consistent and long-term approach to ESG stress testing, the draft Guidelines are designed to accommodate future methodological advances and improvements in data availability.

The ESAs invite interested parties to provide feedback on the consultation paper by answering questions via an online survey no later than 19 September 2025. All responses will be published on the respective ESA websites unless otherwise requested. In addition , a public hearing is also scheduled for 26 August 2025 , from 10:00 to 12:00 CEST. Further details, including login credentials, will be provided closer to the event date.

One of the central elements of the proposal concerns the distinction between two main objectives of stress tests . On the one hand, there is the assessment of short- and medium-term financial resilience , aimed at measuring the ability of institutions to cope with shocks linked to ESG risks, in a time horizon that does not exceed five years . On the other hand, there is the analysis of the impact of ESG factors on the business model of companies in the long term , even beyond ten years. In the latter case, the aim is to understand whether strategies and operations are sustainable in light of the ongoing climatic, social and regulatory transformations.

In defining the priorities for intervention, the ESAs propose a gradual approach . The first phase includes a focus on environmental risks and in particular on climate risks , distinguishing between physical risks , such as extreme weather events or phenomena linked to the loss of biodiversity, and transition risks , i.e. those connected to regulatory, technological or reputational changes induced by the transition to a low-emission economy. Only at a later stage , and depending on the evolution of data and methodologies, will it be possible to extend the analysis to the social and governance components.

The draft also highlights the need to calibrate the effort required based on the degree of exposure to ESG risks of each institution . The principle of materiality guides the entire methodological approach, requiring competent authorities to adopt a risk-based approach, capable of precisely identifying which threats are most relevant depending on the portfolio, sector of activity or geographical location of the supervised institutions. This allows avoiding an indiscriminate application of the tests and containing administrative burdens, while maintaining a high level of supervision.

From an operational point of view, the document recommends a careful definition of stress scenarios, which must be plausible but severe, built on solid scientific bases and consistent with available data.

Much space is also dedicated to organizational aspects. Authorities will have to equip themselves with human resources with specific skills in ESG and stress testing , develop adequate IT infrastructures for data collection, management and analysis , and set up mechanisms for validation and quality control of the results . The availability of reliable and up-to-date ESG data is considered an essential prerequisite for the success of the entire process. In the absence of complete information, authorities may use proxies or reasonable estimates, but at the same time they will have to encourage institutions to improve their internal collection and reporting capabilities.