Climate risks are the risks posed to the financial sector by climate change itself (physical risks) and by our collective efforts to mitigate these (transition risks). These risks vary depending on the climate scenario considered. As the notion of climate risks becomes mainstream, so does the demand of financial institutions to quantify their potential impact. Broadly, two types of analysis can be conducted to do so: either (1) “assessing the expected” or (2) “stressing the unexpected”, but highly material tail events
This report provides guidelines to build an adverse climate scenario that can be used by financial supervisors as inputs into either traditional or climate-specific stress-tests of regulated entities. The report has been designed to cover the key metrics and indicators found in traditional stress-tests, integrating both risks associated with the transition to a low-carbon economy as well as physical risks in a +4°C / +6°C world. The report provides both insights into key indicators needed in the context of climate stress-tests or scenario analysis, the values they would take in the context of transition risk and physical risk analysis based on the existing literature, options for modelling these indicators moving forward, and example applications developed by the 2° Investing Initiative.