On 19 December 2022, the European Central Bank (ECB) published a report on good practices for climate stress testing.

According to the report, climate stress testing exercises have emerged as a key tool for supervisors to assess the impact of climate-related risks on the banking system. The 2022 ECB climate stress test (CST) was a unique exercise in terms of its exploratory nature and learning character. The exercise acted as a catalyst for banks to start or continue working on all aspects of prudent climate stress testing.

The aim of the report is to provide banks with examples and suggestions on how to improve their climate stress testing capabilities based on identified good practices from the 2022 ECB CST and to support banks in their transitional journey. The report aims to facilitate banks’ efforts to align their practices with the supervisory expectations set out in the ECB Guide on climate-related and environmental risks.

The report highlights amongst other things that, whilst banks have made some progress on incorporating climate-related risks into their stress testing frameworks and have delivered comprehensive and innovative information despite the prevailing challenges, there is a high level of inconsistency across banks’ practices, and several areas of climate stress testing have identified where there is need for improvement.