Banks begin to model climate risk in loan portfolios

Environmental stress tests and scenario analysis reveal hidden risks

Used by large banks since the early 1990s, stress testing has grown to encompass all manner of risks. One of the latest additions to the practice is the risk posed by climate change and environmental regulation.

The use of stress testing, as well as scenario analysis, to forecast the impact of climate change on loan portfolios is only a few years old, and in these early days banks are taking different approaches. But some are already adjusting lending strategies based on their assessments of th