The Association for Financial Markets in Europe (AFME) and Oliver Wyman have today published a new report entitled “A Common Path to improve European Climate Risk Stress Testing and Scenarios Analysis”. The report outlines the key challenges EU banks are experiencing surrounding climate risk stress testing and provides recommendations to improve future stress tests.

The report finds that, since the last ECB climate risk stress testing exercises, banks have developed sophisticated approaches to improve their understanding and analysis of climate risks internally, taking inspiration from lessons learned and supervisory guidance in place. The report discusses key highlights from banks’ experience and understanding so far, while outlining areas of focus to improve future climate stress tests and scenarios analysis.

Following a survey of 15 of AFME’s member banks and engagement with relevant regulatory and supervisory authorities, such as the ECB, EBA and the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), the report highlights key challenges that EU banks are currently experiencing in terms of: scope, data, time horizons, scenarios and different risk types.

The report also provides several recommendations for policymakers in order to improve future climate risk stress tests and scenarios analysis. In this respect, AFME’s member banks suggest further supervisory provisions, including: materiality thresholds, consistent data governance framework and collection guidance, meaningful and quantifiable scenario analysis (not solely limited to credit risk) with shorter time horizons, and a framework for nature-related risk considerations in line with the work of the TNFD and NGFS.

The paper follows a previous AFME publication on industry learning from the 2022 ECB climate stress test and aims to bridge efforts of banks and policymakers to improve climate risk stress testing methodology and data. AFME urges further collaboration between banks and policymakers to engage on meaningful solutions, in line with the detailed recommendations set out in the report.