Climate Stress Test

Banks and insurers run climate stress tests to gauge financial exposure to physical and transition climate risks

Climate scenario analysis and stress testing explores the financial impacts and exposures on firms’ balance sheets and the financial system under a range of different potential climate pathways.

Banking supervisors and other regulators are increasingly asking financial services businesses to incorporate climate change scenarios into their risk and stress-testing processes. This enables them to ensure that banks have sufficient capital to maintain operations during adverse climate scenarios or policy shocks. For example:

Stress testing involves working with climate scenarios, or transition pathways, such as the Network for Greening the Financial System (NGFS) Climate Scenarios or the IPCC’s Representative Concentration Pathways (RCPs), which are generated from Integrated Assessment Models (IAMs) and can be accessed through MATLAB® with the Climate-IAM-Explorer.

Combining climate data with the tools in the Statistics and Machine Learning Toolbox™Financial Toolbox™, and Risk Management Toolbox™ enables users to do the following:

See also: bank stress test, risk management solutions, Monte Carlo simulation, IFRS 9, Basel III, model risk, financial model validation