PROJECT DESCRIPTION
BACKGROUND
2DII developed in previous LIFE projects the Paris Agreement Capital Transition (PACTA) methodology. PACTA is a free, open-source methodology and tool, which measures financial portfolios' alignment with various climate scenarios consistent with the Paris Agreement. Since its introduction, this concept has been integrated into the practices of major financial institutions (with more than 1 500 users worldwide), as well as by supervisors and central banks (EIOPA, California Department of Insurance, Bank of England, and others). Building on this experience, 2DII introduced an asset-level based bottom-up transition risk stress test in 2020, developed in close collaboration with EIOPA. Following the target to lower transaction costs for climate assessments, this transition risk tool was released open-source and free-for-use. Over the next years, climate stress-test scenarios are set to proliferate as supervisors around the world begin to implement related exercises and private sector actors develop supportive tools as well. While repositories for economic climate scenarios exist (e.g. the NGFS platform), equivalent solutions for financial scenarios are lacking. Furthermore, the design of available scenarios is still limited by a narrow focus on climate change indicators. Elements related to the ecological impact of investments and loans or to just transition, for example, are missing.
OBJECTIVES
The STRESS project aims to provide better climate change risk management for companies, based on engagement with a wide range of scenario analysis and stress testing results. 2DII’s STRESS platform, by offering a transparent, publicly-accessible, and open-source solution to climate stress testing of EU financial institutions, can foster closer cooperation and knowledge-sharing in the area of climate stress testing between EU financial institutions. Further, 2DII’s STRESS platform, through the public provision of a climate stress testing solution in combination with increased climate risk disclosure regulation from the side of EU financial regulators can help funnel financing towards sustainable finance products for SMEs and thus provide a greater inclusivity of SMEs in a just climate transition. The STRESS platform scenarios aims to include not only climate financial scenarios associated with carbon emissions but, in subsequent iterations, biodiversity financial scenarios as research in the biodiversity impact on financial stability progresses.
The objectives of the STRESS project are to:
- Reduce the transaction costs for the private sector to access and apply financial sector stress-tests and scenario analysis frameworks developed by central banks, financial supervisors, and research organisations.
- Facilitate harmonisation between different approaches both in Europe and globally by providing an exchange platform for financial sector stress-tests.
- Ensure that the design of climate-related stress-tests includes other sustainability themes, notably related to ecosystem service loss and the just transition.
RESULTS
Expected results:
- A repository of climate stress-test exercises for financial institutions. 2DII will develop a repository of climate stress-test exercises implemented by leading research organisations in Europe and globally. This repository will allow users to search stress-test scenarios, export them for application in their organisations, and compare indicators and results across specific exercises.
- The expansion of the model to include ecosystem service loss and just transition.
- Training and capacity building.
- An online platform for stress-test scenarios reducing search and transaction costs while supporting the harmonisation of the different approaches, as well as ability to develop and understand the specific models.
