Report
In a feedback to the BCBS’s discussion paper on climate scenario analysis, Finance Watch stressed out that currently available climate scenarios all feature major limitations and flaws. Effort to improve CSA should be complemented with timely action to address climate-related financial risks and complementary qualitative approaches such as sensitivity analyses and reverse stress tests.
Finance Watch welcomes the work of the BCBS on climate scenario analysis in the context where, as stated by the Committee “typical supervisory tools may not reflect potential losses that may arise from climate-related risks, as historical data on loss patterns have limited predictive capacity for future losses arising from structural changes in the economy”. Climate scenario analyses (CSA) hold the potential to become a source of forward-looking information.
Yet, Finance Watch stressed that it is important to be aware of the existing capacities and limitations of CSA to make sure their results are not misinterpreted leading to potentially flawed conclusions on the risk mitigating actions. The currently available climate scenarios, and correspondingly CSA, all feature major limitations and flaws in the underlying economic models, as recognised by the supervisory community (NGFS) and previously highlighted in the Finance Watch report “Finance in a hot house world”.
Whilst the important work to enhance CSA should continue, we emphasise the importance of timely action to address climate-related financial risks, as well as the need for complementary qualitative approaches such as sensitivity analyses and reverse stress tests.
