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This document is a detailed user guide for financial institutions looking to understand climate stress testing and develop plans for effectively executing them. It has been created to assist the financial sector in its climate stress testing journey and should be adapted to meet the needs of a given firm. The report covers five major content areas: emerging climate stress testing requirements and the landscape of test structures; best practices for climate stress testing team organisation and the skills required; best practices for climate stress testing data requirements and collection; best practices for selecting the scenarios and models to use in climate stress testing; and how climate stress testing outputs can and should be applied to meet regulatory requirements and produce useful internal insights.

This report identifies obstacles currently faced by institutions and provides recommendations to help overcome these challenges for four specific components of the test—team organisation and skills, data requirements and collection, selecting scenarios and models, and meaningful applications of climate stress testing outputs. For financial institutions, there are four key applications of current climate stress tests: Mobilising and raising the firm’s awareness of climate-related risks; encouraging boards to understand the challenges of climate change and take a strategic, long-term approach to managing climate risks; developing a firm’s capabilities to integrate climate risk into their risk measurement, assessment and management tools and frameworks; and improving climate-related disclosures of financial institutions.