European Supervisors Seek Public Input on ESG Stress Testing Guidelines

The European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA), and European Securities and Markets Authority (ESMA) have launched a joint consultation to gather feedback on new guidelines for integrating environmental, social, and governance (ESG) risks into supervisory stress tests. The consultation, open until 18 September 2025, aims to ensure consistency and long-term resilience across the EU financial sector.

The draft guidelines, mandated under the Capital Requirements Directive (CRD) and Solvency II Directive, focus on improving the transparency and methodology of ESG stress testing. They emphasize a gradual approach, prioritizing climate and environmental risks initially, with plans to expand to social and governance factors as methodologies evolve. Competent authorities are encouraged to assess both short-term financial resilience (e.g., capital adequacy) and long-term business model viability under ESG-related shocks.

As detailed in a joint consultation paper, key proposals include:

• Materiality Assessments: Identifying the most impactful ESG risks based on entities' portfolios, geographies, and sectors.

• Scenario Design: Leveraging scientific data to model physical (e.g., extreme weather) and transition risks (e.g., policy shifts), including cross-sector spillovers.

• Methodological Flexibility: Allowing top-down or bottom-up approaches, depending on data availability and entity sophistication.

The guidelines also address resource allocation, data quality, and cross-border coordination to harmonize standards. While climate risks take precedence, the framework lays groundwork for broader ESG integration.

Stakeholders are invited to submit evidence-backed comments, particularly on cost-benefit trade-offs and methodological challenges. Final guidelines are expected by January 2026.

This initiative reflects the EU’s broader push to align financial stability with sustainability goals, acknowledging ESG risks as systemic threats.