Climate stress testing emerges as a crucial area of interest for financial institutions amidst increased regulatory pressures and demands to prepare for potential climate-related impacts.

Challenges arise in developing the scope of climate scenarios due to evolving risks and uncertainties, including concerns about incorporating physical, transition, and credit risks.

Uncertainty persists regarding the effectiveness and implications of different modeling approaches, with a preference for the more flexible pillar 2 approach over pillar 1 due to regulatory constraints.

Data capture proves challenging, with a lack of historical data hindering robust modeling and decision-making, particularly concerning future climate challenges.

Transition and physical risks present additional challenges in stress testing, including understanding impacts, managing intangible risks, and integrating them into other risk types, posing uncertainties for regulators in imposing standardized charges.