As financial institutions worldwide grapple with how to turn climate-related risks into credible stress testing scenarios, new guidance on climate stress testing for banks offers a timely roadmap.
Climate Stress Testing Methodologies: Current Practices, Challenges, and the Road Ahead – a report by the United Nations Environment Programme Finance Initiative (UNEP FI) and data and AI leader SAS – is based on input from 21 global banks. It benchmarks current practices; identifies gaps in modeling, governance and infrastructure; and offers practical advice for integrating climate stress testing into core risk frameworks.
“Despite varying policies and requirements across regions, regulators worldwide expect financial institutions to assess and disclose climate risks,” says report co-author Peter Plochan, EMEA principal risk management advisor at SAS.
“This new report from UNEP FI and SAS is an indispensable guide for climate stress testing. Its proven best practices can help banks use technology to identify vulnerabilities, meet evolving regulatory expectations and build resilience into their portfolios.”
What is climate stress testing?
Climate stress testing supports an organisation’s resilience to climate-related risks, including physical risks like floods and wildfires and economic risks from the shift to low-carbon activities and renewables.
For financial services firms, stress testing can identify vulnerabilities in loan portfolios, assets and insurance liabilities. With this information, firms can ensure solvency and stability by protecting themselves from potential credit losses, declining asset values and increased liquidity demands.