Europe’s financial supervisors have jointly published final guidelines aimed at integrating environmental, social, and governance (ESG) risks into stress testing frameworks for banks and insurance companies under EU regulatory supervision. The European Supervisory Authorities (ESAs)—comprising the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA)—designed the guidelines to establish common standards for embedding ESG risks consistently across the EU’s financial system.

The new guidance provides national competent authorities with instructions on how to integrate ESG risk factors—including climate and environmental risks alongside broader ESG considerations—into existing stress testing methodologies and complementary assessments under adverse scenarios. The framework emphasizes the importance of risk-based approaches, beginning with materiality assessments that consider financial institutions’ business models, portfolios, geographic exposures, and sectoral activities.

Key elements of the guidelines include recommendations on time horizon selection, scenario design, methodological flexibility (including top-down versus bottom-up approaches), and granular analysis across portfolios, sectors, geographies, and counterparty exposures. Supervisors are also advised to ensure adequate resourcing, including staff expertise in ESG risk assessment and robust data management systems to support high-quality ESG data access.

The ESAs emphasized that the guidelines do not introduce new regulatory obligations for stress testing but will follow a “comply or explain” mechanism by national authorities. The framework is slated to apply from early 2027, with translations into all official EU languages forthcoming.