Good practices for climate and nature stress testing
The European Central Bank (ECB) has published a report outlining good practices for climate and nature-related risk stress testing. The report aims to strengthen banks' capabilities, building on the 2022 ECB climate risk stress test.
From exploratory to robust frameworks
Climate stress testing has become a key supervisory tool to assess the impact of climate and nature-related risks on the banking system.
Building on the ECB's 2022 climate risk stress test (CST), banks have significantly improved their capabilities, with all significant institutions integrating climate risk into their frameworks by the end of 2024.
This report provides examples of good practices identified from the 2022 CST and follow-up activities between 2023 and 2025.
Its objective is to help banks strengthen their stress-testing capabilities, particularly in addressing Expectation 11 of the ECB Guide on climate-related and environmental risks.
The report also supports banks and supervisors in preparing for future exercises and the EBA's upcoming Guidelines on environmental scenario analysis, effective January 1, 2027.
It fosters dialogue and shares practical suggestions to overcome challenges and advance approaches in the banking sector.
Data gaps and modelling advances
The collection of greenhouse gas (GHG) emissions and energy performance certificate (EPC) data remains a challenge for banks, though some are developing proprietary indicators to address scarcity.
High-quality data is essential for robust risk assessment.
The report highlights good practices for integrating climate-related risks into transition risk models, enabling granular counterparty-level analysis.
Banks are extending model variables beyond carbon prices and sectoral gross value added, developing sectoral models for corporate exposures, and increasingly engaging in counterparty-level modelling for both probability of default (PDs) and loss given default (LGDs).
Compared to 2022, banks have also developed more sophisticated approaches for physical risk and taken initial steps towards integrating nature-related risks into stress testing, with a focus on acute physical risks.
The 2026 updates specifically expand on these modelling approaches for physical and nature-related risks.
Guidance, not a silver bullet
This report offers valuable guidance for banks navigating the complex landscape of climate and nature-related risk stress testing.
While highlighting significant progress in modelling capabilities, it candidly acknowledges persistent data gaps and the nascent stage of chronic physical risk integration.
Ultimately, the document serves as a crucial benchmark for supervisory expectations, yet underscores that robust risk management remains an evolving, institution-specific endeavor.