ESA Consultation Paper on Guidelines for Integrating ESG Risks into Stress Testing
On 27 June 2025, the European Supervisory Authorities (“ESAs”) jointly published a consultation paper setting out proposed guidelines for integrating environmental, social, and governance (“ESG”) risks into supervisory stress testing activities.
The consultation paper is part of the ESAs’ mandate under the revised legislation (including the Capital Requirements Directive and Solvency II) and seeks to establish consistent and robust supervisory practices in assessing ESG risk exposures.
In summary, the draft guidelines are intended to harmonise how competent authorities incorporate ESG considerations in their stress tests of certain financial institutions. Hence, whilst the draft guidelines are addressed to competent authorities (i.e. regulators) rather than firms themselves, they will be indirectly relevant to firms given they will inform how EU competent authorities conduct stress tests once adopted.
Key proposals
The draft guidelines propose that competent authorities should consider all ESG risks and their potential evolution when designing their framework for supervisory stress testing and keep the relevance of ESG risks under review.
The ESA’s propose that competent authorities should precisely define their objectives when performing ESG stress testing, considering both the resilience of the capital, liquidity and loss absorption capacity of financial entities in the face of material risks including ESG risks over the short- to medium-term, and the resilience of strategies and business models over a medium- to long-term horizon.
The draft guidelines emphasise that competent authorities should adopt a risk-based approach, starting with a materiality assessment to identify the most relevant risks that should be part of a stress test exercise scope.
The guidelines suggest a gradual approach to implementing ESG stress tests, with environmental and climate-related risks at the forefront (acknowledging the more advanced nature of climate data and modelling). But the ESAs underscore that social and governance factors will also be addressed progressively as data and methodologies mature.
The guidelines set out detailed suggestions as to how competent authorities can scope and design ESG stress tests, as well as the organisational and governance arrangements they should put in place.
The consultation paper highlights the importance of designing scenarios in a way that captures physical climate risks (such as extreme weather events or biodiversity loss) as well as transition-related risks (policy shifts, market re-pricing) and any second-round effects (such as macroeconomic consequences or broader sectoral contagion). Competent authorities are also asked to ensure that data used in these exercises is of sufficient quality, supplemented by complementary techniques such as expert judgement where full or consistent data sets are not available.
Practical implications
For financial institutions subject to stress tests, these proposals mean that supervisors are likely to increase the granularity of data requests and place heightened scrutiny on ESG risk integration. Firms will need robust internal processes to identify and measure the impact of ESG risks, including relevant scenario analysis and forward-looking projections for both capital and liquidity. Institutions can expect regulators, over the coming years, to test their ability to address these risks.
Next steps
The consultation closes on 19 September 2025, and participants are invited to provide feedback on all aspects of the proposals, including their scope, data requirements, scenario design, and sectoral application.
Following this consultation phase, the ESAs will refine the guidelines and aim to finalise them by 10 January 2026.
