backThe European Central Bank (“ECB”) recently launched a supervisory climate risk stress test to assess the ability of banks to manage financial and economic shocks stemming from climate risk. The test will be conducted in the first half of 2022, and the ECB expects to publish aggregate results this July.
The test seeks to identify the vulnerabilities, best practices, and challenges that banks face when dealing with climate-related risk. The stress test is made up of three modules: (1) a questionnaire to determine how banks are building their climate stress test capabilities as a risk management tool; (2) a peer benchmark analysis comparing banks across a common set of climate risk metrics to assess the sustainability of banks’ business models and how exposed they are to companies with high climate exposure; and (3) a bottom-up stress test that targets transition and physical risks. The stress test will target specific asset classes exposed to climate risk instead of the banks’ overall balance sheets.