Introduction
As financial institutions strive to turn climate-related risks into credible scenarios for stress testing, guidelines for climate stress testing are also emerging. The report “Climate Stress Testing: Current Practices, Challenges, and the Way Forward” by the UN Environment Programme Finance Initiative (UNEP FI) and SAS, based on contributions from 21 international banks, offers valuable insights into managing climate risks.
Report Overview
The report compares current practices, identifies modeling, governance, and infrastructure deficiencies, and provides practical advice for integrating climate stress testing into basic risk frameworks.
“Despite varying policies and requirements across regions, regulators worldwide expect financial institutions to assess and disclose climate risks,” said Peter Plochan, co-author of the report and principal risk management advisor for EMEA at SAS.
“This new UNEP FI and SAS report serves as a guide for climate resilience stress testing. Its recommended practices, backed by evidence, can assist banks in leveraging technology to identify vulnerabilities, meet evolving regulatory expectations, and embed resilience in their portfolios.”
What is Climate Stress Testing?
Climate stress testing supports an organization’s resilience against climate-related risks, including physical risks like floods and forest fires, as well as transition risks from low-carbon activities and renewable energy sources.
For financial service firms, stress testing can identify vulnerabilities in loan portfolios, insurance assets, and liabilities. With this information, companies can ensure their solvency and stability by safeguarding against potential credit losses, asset value declines, and increased liquidity demands.
In a recent credit risk management discussion, analyst Chartis Research highlighted that “SAS’s climate stress testing technology enables institutions to manage and govern data, implement and run models, and establish a controlled workflow for regulatory and internal stress testing.”
Key Questions and Answers
- What is climate stress testing? Climate stress testing evaluates an organization’s resilience against climate-related risks, both physical (e.g., floods, forest fires) and transition (e.g., low-carbon activities, renewable energy sources).
- Why is climate stress testing important for financial institutions? It helps identify vulnerabilities in loan portfolios, insurance assets, and liabilities, ensuring solvency and stability by safeguarding against potential credit losses, asset value declines, and increased liquidity demands.
- What does the UNEP FI and SAS report offer? The report compares current practices, identifies deficiencies in modeling, governance, and infrastructure, and provides practical advice for integrating climate stress testing into basic risk frameworks.
- How can technology support climate stress testing? Technology, such as SAS’s climate stress testing tools, enables institutions to manage and govern data, implement models, and establish controlled workflows for regulatory and internal stress testing.
