Environmental Stress Testing and Scenarios

The Environmental Stress Testing and Scenarios Programme (ESTS) will deliver the next generation of stress tests and scenarios to enhance the resilience of the global financial system to climate and environmental risks.

A specialist research hub based within the Oxford Sustainable Finance Group (OxSFG) at the University of Oxford, ESTS will work in close partnership with central banks, supervisors, financial institutions, policymakers, and international organisations.

Financial network valuation under climate transition risk

This paper, by CGFI Associate Fellow Raymond Pang, and Head of Transition Finance Research Gireesh Shrimali, uses a general network valuation model to consider financial contagion under climate transition risk.

A Climate Scenario Taxonomy for the Financial Sector

Our proposed climate scenario taxonomy offers a valuable tool for enhancing the transparency, reliability, and applicability of climate scenarios in the financial sector. By addressing the existing gaps in understanding and documentation, this taxonomy can contribute to more effective risk management and sustainable financial practices.

Impact of climate scenario choices on climate financial risk assessment

Using a consistent climate stress test applied across eleven different climate scenarios under two different temperature targets and policy ambitions for a global set of power companies, this paper finds significant variation in the impact that each scenario has on the assessment of company valuation, and in the probability of default.

Sovereign Climate-Contingent Convertible Bond (S-CloCo)

This publication by Associate Fellow Dr Chris Cormack, co-authored with Dr. Andrea Macrina, expands upon the Climate Contingent Convertible Bond (see below), introducing the sovereign CloCo (S-CloCo) which provides a mechanism to enhance climate transition funding. S-CloCo provides novel mechanisms to assist in reducing public debt burdens while operating alongside privately issued CloCos, implicitly providing an alternative monetary stimulus mechanism that can help stabilise sovereign ratings and drive further growth.

Integrating Physical Climate Risks and Adaptation into Sovereign Credit Ratings

Potential climate risk impacts on sovereign credit ratings are far greater than shown in previous studies. This paper shows impacts can be largely offset via investment in adaptation, and acute climate risk and adaptation can be quantitatively incorporated into sovereign credit ratings.

Climate Transition Risk Mitigation: Introducing the CLoCo Bond

This paper by CGFI Associate Fellow Chris Cormack (and Andrea Macrina) propose a novel financial product, the climate-contingent convertible (CLoCo ) bond, whose financial structure permits firms to reduce the risk of de- fault due to adverse climate transition policies over the product’s lifetime.

An Integrated Credit/Climate Scenario Approach Combining Firm-Level Climate Sensitivity with Climate Volatility Add-Ons

This paper published by Z-Risk Engine (authored by CGFI Associate Fellow Dr Scott D. Aguais) presents a detailed approach for developing climate risk stress test scenarios that applies firm-level climate physical-and transition-risk sensitivities and introduces credit risk shocks into climate risk modelling.

An input–output sensitivity analysis of climate–economy integrated assessment models

This paper analyses the underlying interactions between input and output variables of three process–based climate–economy integrated assessment models according to a standardised sub- set of social and economic input variables, and how they contribute to variability in scenario outputs.

The challenge of climate risk modelling in financial institutions – overview, critique and guidance

CGFI Chris Cormack and Gireesh Shrimali discusses the various general issues with climate risk modelling in financial institutions, including data availability and quality, model uncertainty, and integrating climate risks into risk management frameworks.

Toward A Framework For Assessing And Using Current Climate Risk Scenarios Within Financial Decisions

This CGFI discussion paper analyses empirical findings and current best practice to review the adequacy of climate risk scenarios for financial decision making.

A re-evaluation of the financial risks of the net zero transition

This paper examines the potential impact of climate change on financial risk and the uncertainty surrounding the outcomes of different mitigation scenarios. The authors use a consistent climate stress test model to evaluate the effect of three possible net zero scenarios on companies' valuations and financial investments.

TRISK - A Climate Stress Test for Transition Risk

This paper develops a climate stress test that translates climate transition risks affecting individual firms and economies to shocks affecting the financial system. As part of this, we present a forward-looking risk measure - TRISK - which is the expected loss of a financial institution given the uncertain materialisation of a transition stress scenario.

Climate and environmental risks are an unprecedented source of potential financial instability. A new generation of data, evidence and analytical tools are needed to ensure resilience while informing reallocations of capital towards nature-positive and resilient patterns of growth. Innovations in stress testing and scenario analysis are needed to measure and manage risks and their associated complexity and extended time horizons.

ESTS will establish a portfolio of research-led workstreams on:

Scenarios

Enhancing use and usability of scenarios.
Better understanding the limitations of scenarios, as well as the key sensitivities and uncertainties.
Enhancing the application of scenarios in practice.

Stress Testing and Environmental-Financial-Economic Models

Developing open analytical tools, based upon transparent approaches and asset-level data.
Shaping future research and advancing techniques.

Capability and Learning

Bring research into practice, helping stakeholder network to build research capability.
Organise training programmes and provide exchange of knowledge, especially in emerging and developing countries.

Outcomes

ESTS will deliver outcomes along two dimensions

Research hub on stress testing and scenarios

We will shape future research and advance techniques to strengthen the evidence on materiality of climate and environmental risks to the financial system
We will engage in scenario development and analysis with a focus on transparent, bottom-up approaches centered around asset-level data. We develop new research around climate finance, develop roadmaps of practical solutions and financial policies to build out resilience. This includes a set of early warning indicators and risk metrics for financial institutions, economies and sovereigns
We enhance the usability and comparability of scenarios in practice, including assessments around limitations, sensitivities, and uncertainties for financial risk assessment

Engagement and stakeholder platform

We engage with central banks, supervisors, financial institutions, policymakers, and international organisations to inform policy and to transfer expertise to less advanced stakeholders and assist in capacity building.
We convene leading experts and practitioners to advance understanding and best practice on assessing and managing climate, and environmental risks in the financial system.
We deliver world-leading training and capacity building to executive-level in the private and public sector.
Linking expertise with ongoing training programs, including the Oxford Public and Third Sector Academy