Central Bank Climate Stress Testing
Climate Transition Risk
Published
February 2023
Author
ICE has extensive experience assisting central banks and commercial banks with the development of climate stress tests. From developing bespoke models to supplying detailed emissions data across Scopes 1, 2 and 3 for millions of companies, ICE has been at the forefront of helping central banks address the challenges of carrying out climate scenario analysis exercises.
ICE worked with European regulators to help develop a robust stress testing model to comprehensively understand how climate transition risks fundamentally affect economic and financial stability, particularly from a quantitative and forward-looking perspective.
This methodology formed part of the overall framework for the supervisory climate stress test conducted by the European Central Bank (ECB) in 20221, setting the precedent for banks to incorporate climate in their broader stress tests in the coming years.
The availability of granular company level emissions data is one of the most significant challenges that central and commercial banks face when carrying out climate stress testing exercises. Bank loan books can be heavily weighted towards unlisted companies which typically do not publicly report climate data for their business. At the heart of ICE’s methodology is its inference of comprehensive emissions data, which expands beyond listed companies who have publicly reported emissions data to also offer estimated Scope 1, 2 and 3 emissions data for companies that have not publicly reported climate data.
ICE developed its inference model to estimate future Scope 1, 2 and 3 emissions (broken down by all 15 categories of Scope 3) of more than 4 million companies up to the year 2100. This tailored dataset of granular company level emissions data also draws on ICE’s database of 10+ years of historical emissions. Figure 1 below shows an example of how clients can use our tool to see how their portfolio aligns with the Network for Greening the Financial System (NGFS) climate scenarios.
Figure 1: Emission (Scope 1, 2 & 3) Trajectory of Sample U.S. Portfolio vs NGFS Net Zero 2050 Emissions Pathway
Source: ICE. Notes: In this example, our sample portfolio of U.S. companies has an Implied Temperature Score (ITR) of 3.36 degrees Celsius. This score is based on the cumulative estimated emissions of the portfolio to the year 2100. This is calculated using company-level emissions reduction targets and the carbon momentum of companies within the portfolio. In this example, emissions associated with our sample portfolio continue to rise through 2050. The graph above is for illustrative purposes only and was generated using mock portfolio data.
ICE’s methodology incorporates disclosed and estimated corporate emissions data as well as company specific GHG emissions profiles, NGFS scenarios plus individual company emission reduction targets to provide forward projections to the year 2100. The projected future emissions of companies account for regional and global emissions pathways from the NGFS climate scenarios as well as emission reduction targets set by companies. The methodology also accounts for negative emissions as an outcome of (i) adopting carbon dioxide removal (CDR) technologies under different scenarios and (ii) from land use change (LUC).
The approach and methodology developed for the European climate stress tests are now being adopted more broadly within the financial industry, for banks, asset owners and managers to assess, track and manage their climate transition risk.