Embedding climate scenario analysis into financial decision-making

Aligning with global regulatory standards

With an evolving regulatory landscape, it’s important to ensure alignment in all the countries you are operating. To meet climate risk management expectations, financial institutions must ensure that global authorities, such as the Basel Committee on Banking Supervision (BCBS), the European Central Bank (ECB), the European Banking Authority (EBA), and the Prudential Regulatory Authority (PRA), among others, are taken into consideration.

These bodies emphasise the importance of forward-looking scenario analysis and stress testing to assess the resilience of financial institutions under various climate futures. The ability to structure analyses by these guidelines, ensuring consistency, comparability and regulatory compliance, is crucial.

Best market practice methodologies for physical and transition risks

Effective scenario analysis requires bottom-up methodologies that reflect best market practices for assessing both physical and transition risks building in a wide range of climate scenarios, from mild to severe, across multiple time horizons - short, medium, and long-term.

• Physical risk modelling includes granular assessments of acute and chronic climate hazards, such as floods, drought, windstorm and tropical cyclone, tailored to asset-level exposures.
• Transition risk analysis evaluates the financial impact of policy shifts, technological changes, and market sentiment under various decarbonization pathways.

Leveraging scenario sets from authoritative sources like the Network for Greening the Financial System (NGFS), the Intergovernmental Panel on Climate Change (IPCC), and other regulatory bodies, allows institutions to explore plausible futures and quantify their implications with precision.

The significance of transparency and flexibility

Transparency is at the heart of scenario analysis. Full documentation of all assumptions, parameters, and results, allowing users to trace every step of the analysis is essential. This includes:

• Extraction of all input data, including climate variables, asset characteristics, and financial metrics.
• Access to intermediary variables, such as hazard and vulnerability damages, mitigating factor impacts, and exposure metrics.
• Detailed output reports that quantify financial impacts, risk exposures, and scenario comparisons.

This level of transparency not only enhances internal understanding and governance but also facilitates external reporting to stakeholders, regulators, and investors.

Incorporating climate scenario analysis into corporate strategy

Beyond regulatory compliance, financial services firms need to integrate climate scenario analysis into their strategic planning and operational decision-making. By linking climate risk insights to business functions, such as provision and capital allocation, portfolio management, and underwriting, firms can proactively manage emerging risks and seize opportunities in the transition to a low-carbon economy.

Cross-functional collaboration, enabling risk teams, sustainability officers, and business units to work from a shared platform to ensure a unified approach to climate risk that aligns with enterprise-wide objectives and enhances resilience.

Advanced tools for climate risk analysis

In a crowded field of climate risk tools, effective tools distinguish themselves by covering:

• Regulatory alignment with BCBS, UK and European principles.
• Robust methodologies for both physical and transition risks.
• Scenario flexibility across severity levels and timeframes.
• Full transparency and auditability of assumptions and results.
• Strategic integration with business planning processes.

Whether you're a bank, building society, insurer, asset manager, or corporate treasurer, CliMate offers the analytical depth and operational agility needed to navigate the complexities of climate risk.

How can we help?

As climate risk becomes a central pillar of financial stability and strategic foresight, our CliMate tool is specifically designed to assist financial services firms in performing accurate scenario analysis. Tools like CliMate are essential for organisations seeking to lead with confidence. By combining regulatory adherence, methodological precision, and business relevance, Forvis Mazars’ CliMate tool helps firms transform climate risk into a competitive advantage.

To speak with a member of our team to discuss undertaking climate risk scenario analysis, get in touch via the button below.

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