January 8, 2026 European Supervisory Authorities of the European Union (EU)1announced the final version of joint guidelines for reflecting ESG risks in banking and insurance supervisory stress tests (hereinafter “the Guidelines”). This guideline presents the principles, methodology, and operational requirements to be applied when reflecting ESG factors in the banking and insurance supervisory stress test framework, which has been operated differently by each country by the supervisory authorities of each EU member state.
1. Background
This guideline is the Capital Requirements Directive (Directive 2013/36/EU) of the European Union (EU).2 및 Solvency II(Directive 2009/138/EC)3 The amendments were prepared based on the role given to European supervisory authorities. In other words, European supervisory authorities have presented common standards (joint guidelines) to ensure that ESG risks are reflected in banking and insurance supervision practices at the EU level. However, rather than adding new obligations, these guidelines serve as a standard to increase consistency in evaluation methods when supervisory authorities in each country perform ESG-related stress tests.
2. Application schedule
The final version of these guidelines was released on January 8, 2026, and will take effect on January 1, 2027. The European supervisory authorities plan to release a translated version of these guidelines in the future, and the supervisory authorities of each EU member state must notify compliance with these guidelines within two months after the publication of the translated version. Supervisory authorities in each EU member state are not required to comply with these guidelines, but if they do not comply, they must explain the reasons for non-compliance (comply or explain).4
3. Main contents
(1) Identification of ESG risks through materiality assessment
The core of these guidelines is to require supervisory authorities in each EU member state to adopt a ‘risk-based approach’. According to this, the supervisory authorities of each EU member state do not inspect all ESG factors, but first identify ESG-related risks that can actually affect the financial company through a materiality assessment and then conduct inspections focusing on those risks. When determining risk, the financial company’s business model, asset portfolio, and exposure by region and industry are comprehensively considered. This guideline presents an approach that first addresses environmental (E) risks, including climate, in the initial stage, and then gradually expands to social and governance (S·G) risks in line with the speed at which data and models are prepared.
(2) Distinguish between two tracks of stress testing
Supervisory authorities of each EU member state must (a) check financial soundness such as capital, liquidity, and loss absorption capacity like existing stress tests in the short-term (up to 5 years) track, but also reflect the path through which ESG factors affect losses; (b) in the long-term (at least 10 years) track, they must design to evaluate whether a financial company’s strategy and business model can endure for a long period of time, assuming various situations such as significantly strengthened carbon regulations or frequent climate disasters.
(3) Securing ‘public trust, consistency, and explainability’ in scenarios and calculation methods
Supervisory authorities in each EU member state must first utilize scenarios from credible international organizations such as the Intergovernmental Panel on Climate Change (IPCC), the Network for Greening the Financial System (NGFS), and the International Energy Agency (IEA), while analyzing macroeconomic variables (breakdown) and maintaining internal consistency of the scenarios so that they can be applied to financial company portfolios. If possible, member state supervisory authorities should also reflect (i) compound risks when risks occur simultaneously or sequentially and (ii) indirect and amplified second-round effects after the initial occurrence, or, if it is difficult to reflect them, check them through separate supplementary analysis. Calculation methods can be selected from top-down (supervisory authority calculation), bottom-up (financial company calculation), or mixed methods, but member state supervisory authorities must manage deviations in results by presenting minimum standards in accordance with the selected method.
[ESG 스트레스 테스트 산출 방식 비교]
| division | Top-down (Calculated by supervisory authority) |
Bottom-up (Financial company calculation) |
mixed type |
|---|---|---|---|
| calculation subject | Supervisory authorities lead the calculation | The financial company calculates its own | Utilizing supervisory authority calculations and financial company calculations together |
| Core purpose/direction | Increase comparability between institutions, Easy for supervisors to control methodology |
Reflects portfolio characteristics and detailed data of each financial company more precisely and promotes improvement of internal capabilities | Seeking a realistic balance between comparability and precision |
| merit | Results are easy to apply the same standard Easy to compare, calculation method The control of Korean supervisory authorities is strengthened |
Detailed reflection using internal data and models held by financial companies possible, accumulating self-assessment capabilities |
Combining the advantages of an appropriate method depending on the portfolio/risk type |
| Things to keep in mind | Sufficient specificity for each financial company Relatively difficult to reflect |
Variation in calculation results by institution Supervisory authorities have a methodology to reduce Framework and expectations (proportionality (including) must be clearly presented |
Designing which areas and how to calculate them (by portfolio/risk type) is important, and a device to ensure consistency is needed. |
(4) Utilization of operational requirements and test results
These guidelines require not only calculation methods but also organization, data, and quality management systems. Supervisory authorities in each EU member state must secure personnel and data/IT infrastructure that understand ESG, stress testing, and supervisory practices, and provide sufficient preparation time to financial companies, but structure the process so that it is aligned with the supervisory and decision-making schedule. When data are insufficient, supervisory authorities may allow proxy values, estimates, and expert judgment, but should instead check the reliability of the results through quality assurance (QA) procedures (benchmarking, cross-validation, etc.). In addition, supervisory authorities must organize expectations and issues step by step through structured dialogue with financial companies, and test results can be used in the supervisory process, such as risk assessment, capital adequacy review, and strategy discussions.
4. Implications
The European supervisory authorities’ ESG stress test guidelines are expected to become a new standard for global ESG financial supervision. Although it is intended to be applied within Europe, considering the interconnectedness of international financial markets, it is highly likely that supervisory authorities outside Europe will refer to this standard or introduce a similar system when establishing ESG-related supervisory standards.
Financial companies must reorganize the definition and management system of key data such as transition risk (based on carbon footprint, etc.), physical risk (based on asset location, etc.), and industrial exposure, and establish a scenario analysis and quality assurance (QA) system to explain not only the calculation results but also the calculation process. In particular, domestic financial institutions doing business with European financial companies need to prepare step by step the information that may be requested from European financial companies when these guidelines are implemented in 2027.
It is also desirable for companies other than financial institutions to manage vulnerability information based on emissions, transition plans, and business location based on consistent standards and grounds, and to establish a system that can respond quickly to requests for data from financial institutions, assuming that the ESG risk assessment of financial institutions may be further refined in the future.
1 European Supervisory Authorities (ESAs) are the three major financial supervisory organizations in the European Union (EU), collectively referred to as the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), and the European Insurance and Occupational Pensions Authority (EIOPA). Their role is to establish consistent supervisory standards and coordinate cooperation between supervisory agencies in each country to stabilize financial markets and protect consumers within the EU. I do.
2 The Capital Requirements Directive (Directive 2013/36/EU) is a directive establishing the activity authorization and prudential supervision framework for banks and investment companies in the EU. Article 100(4) of this Directive is cited as the legal basis for European supervisors to establish common guidance to incorporate common criteria on consistency, long-term considerations and assessment methodologies in ESG risk stress testing.
3 Solvency II (Directive 2009/138/EC) is a directive establishing the supervisory system for the establishment and conduct (licensing and operation) of insurance and reinsurance business in the EU. Article 304c(2) and (3) of this Directive mandate European supervisors, through the Joint Committee mechanism, to set joint guidelines to integrate common criteria for stress testing of ESG risks and, in particular, require them to explore ways to integrate social and governance (S·G)-related risks into stress testing.
4 If the supervisory authorities of each EU member state do not notify the European supervisory authorities within two months from the date of publication of the translation, these guidelines will be deemed not to be complied with, and the notifications from the supervisory authorities of each member state will be posted on the webpage of the European supervisory authorities.
