Using scenarios to assess climate risks in the financial sector

Climate scenarios are used 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 second phase of StressTests has focused on developing relevant information based on analysis of data from different scenarios and models, building on the findings in the first phase. We have set up the technical machinery to analyse and use the most recent (2022) IPCC Sixth Assessment Report scenarios, IEA scenarios, and the NGFS scenarios and we have held several seminars, workshops, and one-to-one meetings aimed at communicating the information in these scenarios. We have developed new methods for testing the robustness of different targets (such as coal, oil, and gas in 2030 and 2050, the net-zero year, and percentage emissions reductions over time) based on the IPCC scenarios database, which can be used to identify bias and give insights that are better suited to stress testing and risk analysis. This has resulted in a scientific article (under review) and popular science pieces in the media. Based on the results, we have started designing a fact sheet to help financial sector decision-makers apply the right tool for the right question. The third and final phase of StressTest has focused on completing the project material (including an academic article, a new course, and a factsheet) and disseminating the information from the project to relevant financial actors. This has been done through dedicated presentations to key financial actors (including the Bank of Norway and S&P Global), open seminars aimed at scenario users more broadly (at the CICERO day in May 2025), university lectures (including at NHH in Norway and UCL in London), and continued one-to-one meetings with financial actors. StressTest has also contributed to the development of a new course on climate scenarios, which will be given to the Bank of Italy in June 2025, and a fact sheet for financial actors that will explain scenarios and the models behind them. As in all other phases of the project, the outputs of this phase has also been developed in an iterative manner with financial sector stakeholders.

Through continuous engagement and outreach via workshops, presentations, seminars, lectures, and one-to-one meetings, StressTest has made a significant contribution to improved knowledge and capacity building within the financial sector, in Norway and beyond, on how scenarios can and cannot be used for stress testing and climate risk assessment. This knowledge is key to financial actors’ ability to assess, disclose and respond to climate-related risks. Informed by continuous and iterative interactions with stakeholders, StressTest has developed and used machinery and code for reading, plotting, and analyzing the most authoritative international climate scenarios – including the IPCC, IEA, and NGFS scenarios. Based on this, StressTest has provided context-specific scenario information and advice, and contributed to capacity building within a broad range of financial institutions, including smaller and larger banks, financial supervisory bodies, investment funds, central banks, NGOs, and businesses. By engaging with key financial actors and through widely distributed outreach material, the benefits of financial sector learning and capacity building from the StressTest project on the use of scenarios for climate stress testing have likely reached significantly beyond those who have participated directly in the StressTest activities. In addition to this, the project will contribute academically to an improved understanding of the uncertainty and robustness of IPCC scenario findings, which play an authoritative role in informing climate decision making and targets both internationally and nationally. This is relevant not only for the financial sector, but for decision-makers at many levels in the public and private sectors who use scenarios to respond to climate-related risks and facilitate the transition to a low carbon society.

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.