Climate stress testing an emerging challenge for banks worldwide

As financial institutions worldwide grapple with how to turn climate-related risks into credible stress testing scenarios, new guidance on climate stress testing for banks offers a timely roadmap.

Climate Stress Testing Methodologies: Current Practices, Challenges, and the Road Ahead - a report by the United Nations Environment Programme Finance Initiative (UNEP FI) and data and AI leader SAS - is based on input from 21 global banks. It benchmarks current practices; identifies gaps in modeling, governance and infrastructure; and offers practical advice for integrating climate stress testing into core risk frameworks.

"Despite varying policies and requirements across regions, regulators worldwide expect financial institutions to assess and disclose climate risks," said report co-author Peter Plochan, EMEA Principal Risk Management Advisor at SAS. "This new report from UNEP FI and SAS is an indispensable guide for climate stress testing. Its proven best practices can help banks use technology to identify vulnerabilities, meet evolving regulatory expectations and build resilience into their portfolios."

What is climate stress testing?

Climate stress testing supports an organization's resilience to climate-related risks, including physical risks like floods and wildfires and economic risks from the shift to low-carbon activities and renewables.

For financial services firms, stress testing can identify vulnerabilities in loan portfolios, assets and insurance liabilities. With this information, firms can ensure solvency and stability by protecting themselves from potential credit losses, declining asset values and increased liquidity demands.

The SAS^® Solution for Stress Testing provides a highly automated environment with exceptional process transparency, strong controls and governance, and robust data management. It delivers auditable results, transforming stress testing from a compliance exercise into competitive advantage.

In its recent credit risk management vendor analysis, analyst firm Chartis Research commented that SAS' "full suite of enterprise stress testing solutions allows institutions to manage and govern data, implement and execute models, and establish a controlled workflow for executing regulatory and internal stress tests."

Banorte quantifies climate-related risks

For Banorte, one of Mexico's largest banks and a SAS customer, climate change has become a central factor in its risk management strategy.

"At Banorte, integrating climate risk into our risk management framework is part of our Climate Transition Strategy called MEDIR, which is an acronym for five pillars: Modeling climate risk including advanced physical and transition climate stress testing across multiple scenarios, Greening (Enverdecer in Spanish) our value proposition, Decarbonizing our operations, Integrating climate risk into business as usual and Reporting material climate matters," said Jorge Granados, Managing Director of Credit and Climate Risk at Banorte.

"By quantifying potential losses tied to climate-related risks, we help our clients, make our business sustainable and deliver long-term value to our shareholders."

Part of wider risk management efforts

For many organizations, climate stress testing is part of wider risk management efforts. At RiskMinds International last month in London, SAS Vice President of Risk, Fraud and Compliance Solutions Anselmo Marmonti moderated a panel of executives from SAS customers Abu Dhabi Islamic Bank (United Arab Emirates), MUFG (Japan) and Nordea (Finland) to discuss "AI-Powered Credit Process: Balancing Innovation, Risk, and Regulation."

In other presentations led by SAS at this top risk management event for financial institutions, SAS executives discussed AI-enhanced balance sheet management; transforming risk management through AI; credit risk and machine learning; AI governance frameworks; and navigating financial crime threats and opportunities.