Introduction for supervisors to scenarios and stress tests of climate change risks

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Climate-related events and their associated risks are subject to significant uncertainty in terms of their timing, frequency and severity.

This unusual degree of uncertainty means traditional techniques of risk analysis that rely on historical data will lead to misleading pricing and assessment of climate risks.

Forward-looking climate scenario analysis and stress-testing have therefore become critical tools for assessing the potential implications of climate change on economies, financial institutions and financial systems.

This report reviews the financial risks posed by climate change, explains the sources of uncertainty in climate risks, and the role of climate scenarios and stress-testing in assessing those risks. It provides practical guidance for supervisors in designing climate scenarios and stress tests of climate risks.

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