FINANSMARK-Finansmarkedet

Climate scenarios are now being used not just by policymakers, but increasingly by the financial sector in response to increased demand for, and regulation of, climate-related corporate and investor disclosure. Climate risk disclosure and scenario stress testing feature in several regulatory initiatives for financial institutions and their underlying investments across Europe and globally. As financial and corporate actors begin implementing the recommendations, many questions arise: what climate scenarios should be used, how to apply long-term scenarios for short-term decision-making, and how can climate risks be managed under different scenarios? The first phase of StressTest has identified existing knowledge and stakeholder needs. This phase has involved compiling literature and many one-on-one meetings with a variety of institutions (around 10 covering banks, non-governmental organisations, regulators, and companies). Additional presentations and feedback sessions have been held, and there has been close collaboration with the UNEP Finance Initiative, culminating in a report titled Pathways to Paris and many webinars with users. This work has been disseminated to scenario users to build capacity on scenarios to support climate risk-based decisions via seminars and workshops as well as one-to-one meetings to allow for deeper and more detailed discussions around scenario strengths and weaknesses in relation to concrete user needs. We hosted an event with users, disseminating our results and eliciting feedback, as a side-event at the event: CICERO Presents a full day of climate knowledge, 11/05/2023. The project is now in its second phase, where the goal is to develop scenario information and guidance for financial decision-makers based on the outcomes of the first phase. We are currently in the proscess of producing a dataset and guidelines that allow the financial sector to respond concretely to emerging regulatory demands on scenario stress testing and to better align investments with overarching climate objectives and we have held more than 10 seminars, workshops, and one-to-one meetings in the last year focused on these aspects. We have set up the technical machinery to analyse and use the most recent (2022) IPCC Sixth Assessment Report scenarios and the NGFS scenarios and are now working on debiasing scenario ensemble results to identify robust insights that are better suited to stress testing and risk analysis. Based directly on the outputs of phase one and a survey undertaken with UNEP-FI we are designing guidelines to help financial sector decision-makers apply the right tool for the right question. The goal here is to build a hierarchy of scenario tools – from the simplest to the most complex – that can be used to answer the most commonly asked questions in a way that ensures transparency, robustness, and useability. All the outputs from this phase of the project are being developed in an iterative manner with financial sector stakeholders, including through workshops iterating on data requirements planned over the coming year.

Increased demand for disclosure of climate-related corporate and investor information on risk has both broadened the stakeholder base and the purposes for which climate scenarios are used. Clear messaging from regulatory authorities have shifted attention to the financial risk that can result from climate risk. Climate risk disclosure and scenario stress testing feature in several regulatory initiatives for financial institutions across Europe and globally. As financial and corporate actors begin implementing the recommendations and preparing for climate risk disclosure, many questions arise: what climate scenario(s) should be used, how to apply long-term scenarios for short-term decision-making, and how can climate risks be managed under different scenarios? There are a plethora of long-term climate scenario and modelling approaches available, but there is a lack of guidance and context for interpreting scenarios for short-term financial decision making. There is a growing need for comparable risk-based data sets for interpreting long-term emission target scenarios for short-term financial decisions, as well as for online guidance and training to build knowledge on climate scenarios that are needed for corporate and financial actors. StressTest will fill a stakeholder need for climate scenario tools and guidance for financial decision-makers. The main objective of this project is to produce a dataset and guidelines that allow the financial sector to respond concretely to emerging regulatory demands on scenario stress testing and to better align investments with overarching climate objectives. To meet the stakeholder needs requires scientific advancements to develop scenario tools and apply them in a way that affects decisions. The proposal concept was developed with input from financial actors and scenario producers gathered in two workshops, highlighting their central role in identifying and addressing this research gap.