Stress testing social and governance risks: the potential of ESG rating agencies

Recently, there has been a growing focus on sustainability issues within the financial sector. However, quantitative analysis of social and governance aspects has been challenging due to difficulties in data modelling. With the recent regulatory updates for standardised disclosure, the next step could be the implementation of stress tests, given their widespread use in the supervisory environment. The article analyses the possibility of borrowing certain aspects of rating agency methodologies for a future exercise. It identifies common elements that need to be analyzed and highlights areas where institutional intervention will be necessary.