Climate stress testing: understanding vulnerabilities and limits
Use climate scenarios to examine financial vulnerabilities, challenge assumptions and inform decisions without treating scenarios as forecasts.
Facultas Advisory · Originally published
Revised edition
Start with a decision
Climate scenario analysis can explore how different physical and transition pathways affect exposures and financial outcomes. Define the decision, portfolio and time horizon before choosing a scenario or a modelling approach.
Trace the transmission channels
Consider how hazards, policy changes, technology or market responses could affect counterparties, assets and operations. Translate these effects into the financial measures relevant to the exercise, while documenting data gaps and assumptions.
Keep uncertainty visible
Scenarios are not forecasts and do not assign certainty to a particular future. Results depend on model design, coverage and assumptions. OSFI’s standardized exercise explicitly identifies limitations and cautions against treating its results as a comprehensive sizing of climate risk.
Use results proportionately
Identify concentrations and sensitivities, challenge apparent precision and compare alternative assumptions. Findings can support further analysis, risk limits and resilience planning. They do not guarantee adequate capital or prove that an institution is resilient to every climate outcome.
Reference
OSFI / BSIF — Standardized Climate Scenario Exercise (opens in a new tab)
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