ESG Stress Test & Quantification
For financial institutions
The ECB views the climate stress test as a learning process for banks and supervisory authorities alike. The stress test is intended to identify weaknesses, find best practice solutions and uncover the greatest challenges for banks in managing climate risks.
The Climcycle stress test module analyses the exposure of banks to greenhouse gas emissions using the key figures provided by the ECB. In addition, the module calculates a stress test of the physical and transitory risk affecting the credit risk parameters. The ESG stress test calculates 6 different scenarios (3 short-term, 3 long-term).
Input & Output
The module utilises stress test parameters provided by the ECB as well as public (variable) shift factors that reflect the influence on credit risk parameters.
The results of the stress test module include the calculated key figures and the stressed credit risk parameters. The results of the stress test and a visualised form are available in Climcycle and as a download.
Methodology
The module follows the ECB stress test methodology for 2022 in relation to key figures for metrics 1 and 2.
Furthermore, credit risks are analysed in short-term scenarios in accordance with the ECB methodology. Here, forecasts of the stressed credit risk parameters are based on shift factors from various regulatory publications (ECB, OeNB). An adjustment to internal bank calculations is also possible.
Coverage
The module covers short-term stress scenarios, physical risks, transition risks and all sectors and countries in the scope of the 2022
climate stress test.
Use Case
Automated execution of ESG Stress Tests
Climcycle can perform ESG stress tests based on the ECB methodology. The stress test is based on pragmatic input data and the climate scenarios of the Network for Greening the Financial System (NGFS). The impact on credit risk parameters is calculated and analysed for different scenarios in which physical and transitory risks are taken into account.
