Regulatory Bodies in the EU Advocate for Incorporating Environmental, Social, and Governance (ESG) Risks into Banking and Insurance Stress Tests
The European Supervisory Authorities (ESAs) have recently published a draft of Joint Guidelines on ESG stress testing, marking a significant step towards harmonizing methodologies and practices among banking and insurance supervisors in the European Union.
As of June 27, 2025, the ESAs launched a public consultation on this draft, with the consultation period running until September 19, 2025. A public hearing on the draft Guidelines is scheduled for August 26, 2025, to gather stakeholder feedback and discuss the consultation draft.
The draft guidelines propose a gradual roll-out to expand the scope of ESG risks assessments, with the potential to add "S" and "G" components as tools and data become available for these factors. The ESAs' guidelines cover ESG risks and propose a focus on climate and environmental risks, including physical and transition risks.
The ESAs' guidelines also propose materiality assessments to identify the most material ESG risks to financial entities. Sufficient human and material resources are recommended for the ESG stress testing process, including ESG risk expertise and data collection and management capabilities.
The ESG stress tests should account for interconnections and spillover effects between financial sectors. The ESAs acknowledge that ESG stress testing is a relatively nascent field compared to more traditional financial stress testing.
The draft guidelines also address the scenario design and the time horizons for stress tests with integrated ESG risks. The potential impact of ESG risks on traditional financial risk categories like market, credit, counterparty, and underwriting risks, as well as strategic, operational, and reputational risks, are considered.
Levels of data granularity to be considered are included in the guidance. Significant progress has been made to explore available data and models, particularly for environmental risk linked to climate change.
The ESAs plan to finalize the joint guidelines by the end of 2025 and publish the finalized guidelines in early 2026. This phased approach ensures stakeholder involvement and harmonization of methodologies in ESG risk stress testing across the banking and insurance sectors in the EU.
Stakeholders are encouraged to submit comments and feedback via an online survey during the consultation period. Following the consultation and the public hearing, the ESAs will likely review the feedback before issuing the final guidelines.
[1] European Supervisory Authorities. (2025). Draft Joint Guidelines on ESG stress testing. Retrieved from
- The ESAs' guidelines cover ESG risks and propose a focus on climate and environmental risks, including physical and transition risks, which are integral aspects of environmental science.
- In the process of finalizing the joint guidelines, sufficient human and material resources are recommended for the ESG stress testing process, including ESG risk expertise and data collection and management capabilities, which may require financial investments from banking and insurance institutions as a part of their business strategy.
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