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Climate risk stress tes

t

SSM stress test 2022

October 2021

Climate risk stress test - Contents

1

Contents

1 Introduction 2

1.1 Background 2

1.2 Objectives of this note 2

2 Quality assurance process 3

2.1 Purpose of the quality assurance process 3

2.2 Timeline of the exercise 3

3 Instructions on how to fill in the templates 5

3.1 Module 1: Qualitative questionnaire 5

3.2 Module 2: Climate risk metrics 7

Box 1 Examples of Scope 3 GHG emission proxies 12

3.3 Module 3: Bottom-up stress test projections 13

Box 2 Examples of EPC rating proxies 18

Annexes 37

Annex A.1: Module 1 questionnaire (to be provided to banks in Excel format) 37

Annex A.2: - 55

Annex A.3: Guidance for nGAAP banks 56

Annex A.4: Provisional set of scenario variables 57

Annex A.5: List of industries 59

Annex A.6: Examples of climate

-related and environmental events relevant for con duct and physical risk 60

Climate risk stress test - Introduction

2

1 Introduction

1.1 Background

As a competent authority, the European Central Bank (ECB) is required to carry out annual stress tests on supervised entities in the context of its Supervisory Review and Evaluation Process as set out in Article 100 of CRD IV. The draft European Banking Authority (EBA) Guidelines on institutions' stress testing1 leave room for competent authorities to follow various approaches. The ECB will carry out a stress test exercise on climate risk as its annual supervisory stress test for 2022.

The methodological req

uirements described in the following sections of this document are to be considered as a uniform methodology for conducting a bottom-up exercise and are not intended to form the basis of any future regulations. This document draws on several sources, including the ECB Guide on climate-related and environmental risks 2 and the EBA Report entitled "On management and supervision of ESG risks for credit institutions and investmen t firms". 3

1.2 Objectives of this note

This note outlines the main characteristics of the 2022 climate risk stress test exercise and provides banks with guidance on how to conduct the exercise. The remainder of the document is organised into two chapters: Chapter 2 sets out the process for the banks' submissions and provides a high -level overview of the quality assurance process for institutions participating in the exercise; Chapter 3 provides instructions on how to complete the stress test templates. 1 See EBA Guidelines on institutions stress testing, EBA/GL/2018/04, 19 July 2018. 2 See ECB Guide on climate-related and environmental risks: Supervisory expectations relating to risk management and d isclosure, ECB, November 2020. 3

See "On management and supervision of ESG risks for credit institutions and investment firms", Report,

EBA/REP/2021/18, EBA, 23 June 2021.

Climate risk stress test - Quality assurance process 3

2 Quality assurance process

2.1 Purpose of the quality assurance process

The 2022 climate risk stress test exercise is considered to be a joint learning exercise with pioneering characteristics. One of its main objectives is to enhance the capacity of both banks and supervisors to assess climate risk. In this context, the quality assurance process also serves to enhance the supervisory understanding of what climate-relevant data banks have available and the limitations when assessing climate-related risks, to identify best practices and to ensure that banks follow the instructions as set out in this document. In line with the proportionality principle, the intensity and granularity of the quality assurance conducted by the ECB for banks participating in this exercise will be commensurate with the materiality of the issues identified.

2.2 Timeline of the exercise

The exercise will be conducted from March 2022 to July 2022. It will comprise several phases including data collection, quality assurance and the computation o f results.

2.2.1 Phase 1: Data collection

Banks are required to complete the template and produce results based on the instructions set out in this document. 4 Banks are responsible for ensuring that the data and templates submitted are correct, verified appropriately and meet the standards set out in this document, and that the format and structure of the official version of the templates distributed by the ECB are not altered.

2.2.2 Phase 2: Quality assurance

During the

quality assurance phase, the ECB will analyse the information submitted by banks to ensure that the submissions are i) of a satisfactory quality, ii) aligned with the instructions set out in this document, and iii) provide comprehensive and reliable results for the prescribed assumptions and scenarios. This analysis will include checks to ensure adherence to the instructions and will draw comparisons with peer benchmark data and challenger views as appropriate. 4

In conjunction with any technical clarifications issued via the official communication channels for this

exercise (for example, the FAQ portal). Climate risk stress test - Quality assurance process 4 Banks will be requested to address quality assurance queries raised in relation to the information provided. The ECB may require banks to adjust their inputs, perform further analysis or provide supporting evidence to substantiate their results. During this phase, the ECB will communicate closely with the banks to clarify any pending issues. Climate risk stress test - Instructions on how to fill in the templates 5

3 Instructions on how to fill in the

templates The climate risk stress test consists of three modules: Module 1 is a qualitative questionnaire and is described in Section 3.1; Module 2 requests banks to calculate climate metrics and is described in Section 3.2; Module 3 represents the bottom-up stress test projections, for which the methodology is presented in Section 3.3. All significant institutions participating in the 2022 climate risk stress test exercise are subject to Module 1 and Module 2 5 The ECB identifies a subset of participating banks that it expects to conduct Module 3. However, in order to establish a starting point, all banks participating in the 2022 climate risk stress test exercise are expected to submit the required information for Module 3. Given that all three modules constitute interrelated parts of a single stress test exercise, institutions are expected to submit the required information for Module 1, Module 2 and Module 3 (depending on applicability) simultaneously. The exercise will be conducted at the consolidated level of each institution.

3.1 Module 1: Qualitative questionnaire

3.1.1 Instructions

The purpose of this module is to gain an illustrative overview of the institution's internally available stress testing capability and capacity including its climate risk stress testing framework, management and modelling practices. The questions in this survey concern qualitative information on the institution's current practices, i.e. based on the bank's status quo at the point in time when this stress test is performed. Where a question refers to an institution's future plans, this is clearly indicated. Institutions must answer the questions in the template provided, largely through pre -defined drop -down menus. For the first submission cycle, banks are not asked to provide any supporting documentation. In case of need, occasional and tailored requests for supporting documentation may be requested from banks during the quality assurance process for Module 1.quotesdbs_dbs4.pdfusesText_7

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