A Common Path to Improve European Climate Risk Stress Testing and Scenarios Analysis

The report entitled “A Common Path to Improve European Climate Risk Stress Testing and Scenarios Analysis“ was published by AFME and Oliver Wyman. The report addresses the challenges faced by EU banks in climate risk stress testing and provides recommendations for improvement.
According to the report, EU banks have made significant progress in enhancing their understanding and analysis of climate risks since the last ECB climate risk stress testing exercises (eventid=16703). Banks have learned from past experiences and supervisory guidance, and the report highlights their key findings and areas of focus for future climate stress tests and scenarios analysis.
The report identifies several challenges faced by EU banks in terms of scope, data, time horizons, scenarios, and different risk types. It also provides recommendations for policymakers to improve future climate risk stress tests, including the establishment of materiality thresholds, consistent data governance frameworks, meaningful scenario analysis with shorter time horizons, and a framework for considering nature-related risks.
The report highlights the significance of the 2022 ECB climate stress test and acknowledges the progress made by banks in developing climate stress testing capabilities. However, it also acknowledges that the test results may have underestimated the actual climate risk due to various reasons. The report emphasizes the need for collaborative efforts and iterative progress to address the complex challenges of climate risk stress testing and calls for better data and closer cooperation between the private and public sectors.