ESAs Joint Guidelines on ESG Stress Testing: A Common EU Framework for Integrating Climate and Nature Risk into Supervisory Stress Tests

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The first binding guidance on how EU banking and insurance supervisors must embed ESG risks in their stress testing programmes, with implications for UK and global financial institutions.

Context:

On 8 January 2026, the three European Supervisory Authorities: the EBA, EIOPA, and ESMA, published their joint Final Report on Guidelines on ESG Stress Testing. The publication was mandated by Article 100(4) of the Capital Requirements Directive (CRD6) and Article 304c(3) of Solvency II, both of which required the ESAs to publish joint guidelines on ESG stress testing by 10 January 2026. The guidelines are now in the comply-or-explain notification process for national competent authorities.

The publication follows a public consultation launched in June 2025 (closing September 2025). The ESAs describe the guidelines as a foundational step toward consistent, long-term integration of ESG risks across the EU financial system's supervisory stress testing infrastructure covering both the banking sector (under the CRD framework) and the insurance sector (under Solvency II). The guidelines do not require NCAs to conduct new ESG-focused supervisory stress tests if they do not already do so; they establish the standards and methodologies that must be applied where such tests are carried out.

The timing is significant: the guidelines arrive as EU banks are completing their first internal ESG risk materiality assessments under CRD6, and as EIOPA prepares for the 2028 Life Insurance Stress Test. Both exercise programmes will now be expected to incorporate ESG factors in line with the joint guidelines.

Rules and Guidelines:

The joint guidelines establish five key elements. First, an ESG-inclusive stress test framework, NCAs must integrate ESG risks (beginning with environmental and climate risks, with social and governance risks to be incorporated over time) either by embedding them in existing stress test frameworks or by conducting complementary assessments. Second, a long-term perspective, ESG stress tests must capture the time horizons relevant to physical and transition risk materialisation, which typically extend beyond the 1–3 year horizon of conventional stress tests. Third, scenario design, NCAs are directed to use established scenario frameworks (NGFS, IPCC, IEA) and to ensure scenarios capture both orderly and disorderly transition pathways and severe physical risk scenarios. Fourth, governance and organisational arrangements, NCAs must ensure supervisory staff have the requisite expertise in climate science, environmental data, and ESG methodologies to credibly conduct ESG stress tests. Fifth, regular review, given the evolving nature of ESG risk data and methodology, NCAs must review and update their stress testing frameworks as the evidence base develops.

The guidelines also encourage consistency between bank-facing and insurance-facing ESG stress tests, an important signal for financial conglomerates operating in both sectors, who may otherwise face duplicative and inconsistent stress test requirements from their banking and insurance supervisors.

Businesses Affected:

• All banks, investment firms, and credit institutions subject to CRD6 across EU member states will face supervisory ESG stress tests designed and conducted in accordance with these guidelines.

• Insurance companies subject to Solvency II, whose supervisors will apply the joint guidelines in conducting insurance-focused ESG stress tests from 2026 onwards.

  Financial conglomerates with both banking and insurance operations will benefit from the guidelines' push for cross-sectoral consistency.

• UK financial institutions with significant EU operations may be subject to EU supervisor-led ESG stress tests under these guidelines for their EU subsidiaries, while also managing the PRA's own climate scenario analysis requirements.

Next Steps:

• Review your internal ESG risk materiality assessment against the scenario frameworks (NGFS, IPCC, IEA) referenced in the joint guidelines. Ensure your scenario selection is consistent with the guidelines' requirement for both orderly and disorderly transition pathways.

• Engage with your primary NCA to understand their compliance status under the guidelines and their planned ESG stress test calendar. Early engagement allows firms to contribute to scenario design and to calibrate internal modelling accordingly.

• For financial conglomerates: assess whether your banking and insurance supervisors will be applying consistent ESG stress test standards and timelines. The joint guidelines encourage convergence but do not mandate identical approaches.

• For UK firms with EU operations: align EU subsidiary ESG stress test capability with PRA climate scenario analysis requirements under SS5/25. Building a unified climate risk modelling framework reduces duplication.

Source | ESMA | Joint Guidelines on ESG Stress Testing