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Stress-testing climate change scenarios

David Lunsford and Thomas Verbraken
David Lunsford and Thomas Verbraken3/12/2021 6:30 AM GMT+08  • 4 min read
Stress-testing climate change scenarios
Central banks are focusing on stress testing and scenario analysis on the economic impacts of climate change.
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The Biden administration’s focus on climate change may greatly increase regulatory requirements for climate-risk reporting, and climate-change stress tests could be an important part of these regulatory disclosures. But apart from helping investors meet regulatory requirements, these could bring more transparency about companies’ and their investors’ exposures to climate-change risks and opportunities, accounting for a range of potential outcomes.

Accelerating regulatory demands climate disclosure

The Task Force on Climate-related Financial Disclosures (TCFD), established in 2015 by the Financial Stability Board, jump-started the discussion on climate-related disclosure requirements. The TCFD received strong support for the recommendations for climate-risk disclosures it published in June 2017. The Banque de France, Bank of England and Dutch National Bank took a leadership role shortly afterward, proposing to integrate TCFD-inspired disclosure guidelines into their existing supervisory roles. These efforts eventually formed the basis for the Network for Greening the Financial System (NGFS). Now, the NGFS has more than 80 member institutions. Notably, the US Federal Reserve joined the initiative in December 2020.

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