Europe’s three key financial regulatory bodies — ESMA, EBA, and EIOPA — collectively known as the European Supervisory Authorities (ESAs), have released draft Joint Guidelines on ESG stress testing, aimed at standardizing how ESG risks are integrated into stress tests by banking and insurance sector supervisors across the EU.

The guidelines propose that authorities fully incorporate ESG factors — with an initial focus on climate and environmental risks, including both physical and transition risks — into their supervisory stress testing frameworks. The approach is intended to evolve over time to include social and governance risks as relevant tools and data become available.

Key elements of the proposal include:

· Gradual implementation of ESG risk coverage

· Consideration of appropriate time horizons, scenario design, materiality, and data granularity

· Integration of ESG impacts into traditional financial risk categories (e.g., market, credit, counterparty, underwriting, operational, and reputational risks)

· Cross-sector coordination to capture interlinkages between banking, insurance, and securities markets

· Resource allocation, including ESG-skilled personnel and data infrastructure

The ESAs acknowledge that ESG stress testing is still in its early stages but note growing progress in modeling, particularly around climate-related financial risks.

A public consultation on the guidelines is now open until September 19, 2025, and the final guidelines are expected by end of 2025, with publication set for early 2026.