Enhanced scenarios for climate stress-tests

Climate stress-tests are a powerful tool to quantify the exposure of financial institutions to climate financial risks. Scenarios play an important role in stress-tests, but those often used today do not account for endogenous factors, such as the response of the financial system. This could in turn lead to the underestimation of climate risks and missed opportunities for climate change mitigation. This paper explores how a newly developed methodological framework for enhanced climate stress-tests can be used by central banks and financial supervisors to inform the design of prudential measures.