Assessing Financial Risks from Physical Climate Shocks: A Framework for Scenario Generation
The World Bank has published a framework to generate climate scenarios to be used in stress tests.
Most advances in climate stress test focused on transition risk, using mitigation scenarios elaborated by process-based IAM and recently by the NGFS.
The paper identifies five areas, or risk drivers, that make a material contribution to physical climate risks to the financial sector and that are not consistently included in current climate scenarios and tools: (1) extreme weather events; (2) uncertainties in climate models; (3) compound scenarios; (4) indirect economic impacts of shocks; and (5) feedback between the real economy and the financial sector.