Financial regulatory bodies in the EU suggest integrating Environmental, Social, and Governance (ESG) risks into stress test assessments.

The European Supervisory Authorities (ESAs), comprising the European Securities and Markets Authority (Esma), the European Banking Authority (EBA), and the European Insurance and Occupational Pensions Authority (EIOPA), have proposed making Environmental, Social, and Governance (ESG) risks a mandatory part of the stress tests for banks and insurance supervisors in EU member states. This move aims to harmonise practices and ensure the stability of both individual financial entities and the financial system as a whole.

The proposal, which was made public in June 2022, suggests that stress tests should look at short-term shocks of five years or less and longer-term horizons of at least 10 years. This is to provide a comprehensive understanding of the potential impact of ESG risks on the financial sector.

Yannis Dafermos, a professor at Soas University of London, has voiced his concerns about the current climate stress tests, stating that they often leave out some risks, implying that the risks are often higher than assumed. He questions the purpose of stress testing analysis if no action is taken based on the results and worries that financial regulators are conducting stress tests and research but leaving it to governments and other stakeholders to take action.

The ESAs acknowledge that ESG stress testing is still new compared to more traditional financing stress tests, but progress has been made, especially for "environmental risk link to climate change." They also suggest that authorities should consider spillover and interconnections among different financial sectors when possible.

Some economists have expressed concern that current climate stress tests may not fully capture the financial loss from climate risk. However, the ESAs' proposal does not specify any concerns about the effectiveness of ESG stress tests. Instead, it emphasises the need for a harmonised approach across EU member states.

The ESA's joint consultation on the proposed guidelines and common framework is open until 19 September. This article was last updated on July 24, 2025. The ESAs invite stakeholders to provide their feedback on the proposal to ensure a comprehensive and effective approach to ESG risk management in the EU's financial sector.