The Joint Guidelines aim to ensure that competent authorities consistently integrate ESG risks into their national supervisory stress testing activities. These guidelines are addressed to competent authorities and should be applied when performing supervisory stress tests, either by integrating ESG-related risks or by measuring their impact under adverse scenarios. Authorities should allocate sufficient resources…
This document is the final report of the Joint ESAs Guidelines on ESG Stress Testing, published by the European Banking Authority (EBA) in January 2026. It is a 25-page guide intended for competent financial supervisory authorities within the European Union. The scope covers environmental, social, and governance (ESG) risks within prudential stress tests, pursuant to Article 100(4) of Directive 2013/36/EU (CRD VI) and Article 304c(3) of Directive 2009/138/EC (Solvency II). The document targets authorities supervising banking and insurance institutions subject to these directives, with application planned from January 1, 2027 (p. 1-2, 4-8).
The report presents joint guidelines intended to ensure a consistent, transparent, and long-term integration of ESG risks into financial supervisory stress tests within the EU. These guidelines address competent authorities and must be applied when conducting ESG stress tests, either by integrating these risks into existing frameworks or through complementary assessments according to sectoral legislation. The objective is to improve legal certainty, clarity, and transparency of approval processes, as well as to ensure a harmonized approach and common standards for ESG risk assessment methodologies. Authorities must clearly define the coverage of stress tests (portfolios, sectors, geographies), allocate adequate human and material resources, notably ESG expertise and IT infrastructure, and set schedules balancing precision and decision-making requirements. The report emphasizes that the initial focus should be on environmental risks, particularly climate-related, with a progressive extension to social and governance risks according to the maturity of available tools. Authorities must adopt a proportionate approach, based on a materiality assessment of the most relevant ESG risks. Scenarios should cover short-term horizons (up to 5 years) to test financial resilience and long-term horizons (at least 10 years) for strategic resilience. Top-down, bottom-up, or hybrid approaches are considered depending on objectives and entities' maturity. Results must be integrated into supervisory processes, with transparent communication adapted to data quality. The document was subject to public consultation between June and September 2025, receiving generally favorable feedback and some editorial adjustments. Competent authorities must notify compliance before May 2026 (p. 3-4, 8-16, 20-25).
These guidelines were developed in response to a legal mandate arising from the revision of the CRD (Directive 2013/36/EU) and the Solvency II Directive (2009/138/EC), aiming to integrate ESG risks into prudential stress tests. The context is the growing recognition of ESG risks as major factors potentially affecting the financial stability of entities and the system. The document aims to clarify competent authorities' expectations regarding the integration of ESG risks into their supervisory activities, without imposing a new obligation to conduct ESG stress tests, but harmonizing existing practices. The challenges are to ensure coherence, consideration of long-term horizons, and adoption of common standards in the EU, while accounting for the variable maturity of available methodologies and data, notably prioritizing environmental and climate risks initially. The document also specifies limitations, particularly the still emerging nature of tools for social and governance risks (p. 4-5, 17-19).
Consistent integration of ESG risks: Authorities must systematically integrate ESG risks into their stress tests, adapting coverage according to portfolios, sectors, geographies, and activities, considering the maturity of available methodologies and data. A proportionate approach is recommended, based on a materiality assessment of the most relevant risks (p. 8-9, 13-14).
Initial focus on environmental risks: The guide prioritizes an initial focus on environmental risks, notably climate-related, addressing both physical risks (extreme weather events, biodiversity loss) and transition risks (policy, technological, market changes). Extension to social and governance risks is planned progressively depending on tool and data availability (p. 5-6, 8-9, 17-19).
Objectives and time horizons: Two types of exercises are distinguished: short-term stress tests (up to 5 years) to assess financial robustness against economic and financial shocks related to ESG risks, and long-term analyses (at least 10 years) to test the resilience of entities' business models and strategies. Scenarios should rely on recent scientific knowledge and be adapted to objectives, with possible consideration of compound risks and second-round effects (p. 8-10, 12-13).
Methodologies and approaches: Authorities must choose between top-down approaches (centralized calculations by the authority) and bottom-up approaches (calculations performed by entities), or a hybrid approach, depending on entities' maturity and exposure nature. They must define an appropriate level of granularity, including portfolios, sectors, geographies, counterparties, and risk categories (physical, transition, other ESG) (p. 10-13).
Balance sheet assumptions: A static balance sheet approach is recommended initially, with the possibility of a dynamic approach in medium and long term, integrating entities' transition plans. Management assumptions must be realistic and consistent with published strategies, avoiding excessive optimism (p. 13).
Organization and governance: Authorities must allocate sufficient human and material resources, including ESG expertise, data management capabilities, and suitable IT infrastructure. They must set balanced schedules, ensure data quality through rigorous processes, and maintain structured dialogue with supervised entities. Cross-border and cross-sector coordination is encouraged to harmonize practices and consider contagion effects between financial sectors (p. 14-16).
Communication and evolution: Results must be integrated into supervisory processes and, depending on data quality, published transparently to strengthen market discipline. ESG stress testing frameworks should be regularly reviewed and improved based on methodological progress and feedback (p. 15-16).
Public consultation and adjustments: The 2025 consultation received 25 responses, largely favorable. Main comments concerned materiality assessment, the need for a long time horizon (some requesting 25 years, the guide retains at least 10 years), data granularity, and the importance of proportionality. The ESAs incorporated this feedback by clarifying certain aspects without changing the overall approach, maintaining a high-level framework to allow cross-sector application and limit administrative burden (p. 20-25).
Established facts:
- ESG risks, particularly environmental and climate-related, are recognized as major factors potentially affecting the financial stability of entities and the system (p. 5, 17).
- Methodologies and data for environmental risks are more advanced than for social and governance risks (p. 6, 18).
- A proportionate approach, based on a materiality assessment, is essential to optimize the cost/benefit ratio of ESG stress tests (p. 8-9, 19).
- Time horizons must cover both short term (up to 5 years) for financial resilience and long term (at least 10 years) for strategic resilience (p. 8, 22).
Assumptions and interpretations:
- The initial focus on environmental risks, notably climate-related, is a pragmatic step given tool maturity, with a progressive extension to other ESG factors (p. 6, 18).
- Top-down, bottom-up, or hybrid approaches are considered depending on objectives and entities' maturity, each method having specific advantages (p. 10-11).
- ESG models have inherent limitations, requiring complementary analyses and rigorous validation (p. 14).
Uncertainties:
- ESG data quality and availability remain a challenge, notably for social and governance risks (p. 6, 15).
- The speed of climate risk materialization could be faster than expected, justifying a cautious approach in scenario design (p. 23).
- The evolution of methodologies and data requires regular revision of ESG stress testing frameworks (p. 16).
The ESAs recommend that competent authorities apply these guidelines from January 1, 2027, integrating ESG risks into their supervisory stress tests according to a proportionate approach based on a materiality assessment. They should prioritize an initial focus on environmental risks, notably climate-related, while preparing for a gradual extension to social and governance risks. Authorities must clearly define objectives, coverage, scenarios, and methodologies, choosing between top-down, bottom-up, or hybrid approaches depending on circumstances. They must allocate adequate resources, ensure data quality, maintain structured dialogue with supervised entities, and coordinate actions at cross-border and cross-sector levels. Stress test results must be integrated into supervisory processes and, depending on data quality, published to enhance transparency and market discipline. Finally, frameworks should be regularly reviewed to incorporate methodological progress and feedback. Authorities must notify their compliance to the ESAs before May 31, 2026 (p. 3-4, 11-16, 20-25).
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