Recital 42

(42)ESG risks can have far-reaching implications for the stability of both individual institutions and the financial system as a whole. Hence, competent authorities should consistently factor those risks into their relevant supervisory activities, including the supervisory review and evaluation process and the stress testing of those risks. The Commission, by means of the Technical Support Instrument established by Regulation (EU) 2021/240 of the European Parliament and of the Council ¹⁶ , has been providing support to national competent authorities in developing and implementing stress testing methodologies and will continue to provide technical support in this respect. However, the stress testing methodologies for ESG risks have so far mainly been applied in an exploratory manner. To firmly and consistently embed stress testing of ESG risks in supervision, EBA, the European Supervisory Authority (European Insurance and Occupational Pensions Authority) (EIOPA) established by Regulation (EU) No 1094/2010 of the European Parliament and of the Council ¹⁷ and the European Supervisory Authority (European Securities and Markets Authority) (ESMA) established by Regulation (EU) No 1095/2010 of the European Parliament and of the Council ¹⁸ should jointly develop guidelines to ensure consistent considerations and common methodologies for stress testing ESG risks. Stress testing of those risks should start with climate and environment-related factors, and as more ESG risk data and methodologies become available to support the development of additional tools to assess their quantitative impact on financial risks, competent authorities should increasingly assess the impact of those risks in their adequacy assessments of institutions. In order to ensure convergence of supervisory practices, EBA should issue guidelines regarding the uniform inclusion of ESG risks in the supervisory review and evaluation process.