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The evolution of climate stress testing and risks on the horizon
CeFPro's research study for the Climate Stress Testing Summit highlights the growing significance of climate stress testing in financial institutions due to regulatory pressures and evolving risks, with challenges emerging in scenario development, modeling approaches, data capture, and managing transition and physical risks.
Apr 01, 2024
The evolution of climate stress testing and risks on the horizon

  • 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.

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