Introduction for Supervisors to Scenarios and Stress Tests of Climate Change Risks

Year Published

2023

Contributing Organizations

International Monetary Fund (IMF)

Global Affairs Canada (GAC)

Toronto Centre

The Swedish International Development Cooperation Agency (Sida)

Type of Resource

Guidance

Tool

Languages

English

Relevant Topics

Core Topic

Risk Management

Topic 2

Climate Reporting

Target Audience

All

Relevant Geography

Europe

Resource Description

This resource introduces financial sector supervisors to scenarios and stress testing of climate risks. It provides background on climate scenarios, and guidance on the design of climate stress tests.

Why This Matters

Supervisors have an important role to play in the analysis of climate-related financial risks, with scenario analysis and stress testing being critical tools for assessing the potential risks that climate change poses for financial institutions.

Key Insights

Explains the role of scenarios and stress testing in assessing the various risks posed by climate change – with further explanations on sensitivity analysis, designing climate scenarios, and NGFS scenarios
Distinguishes between the advantages of two types of stress-testing: ‘bottom-up’ and ‘top-down’
Outlines what climate scenarios, methodologies and information should be used for designing stress-tests
Further provides an example of a pilot stress test by The Bank of England

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