Environmental stress testing and scenarios
The Environmental Stress Testing and Scenarios Programme (ESTS) focuses on the next generation of stress tests and scenarios to enhance the resilience of the global financial system to climate and environmental risks. A specialist research hub based within the Oxford Sustainable Finance Group (OxSFG) at the University of Oxford, ESTS will work in close partnership with central banks, supervisors, financial institutions, policymakers, and international organisations.
About
Climate and environmental risks are an unprecedented source of potential financial instability. A new generation of data, evidence and analytical tools are needed to ensure resilience while informing reallocations of capital towards nature-positive and resilient patterns of growth. Innovations in stress testing and scenario analysis are needed to measure and manage risks and their associated complexity and extended time horizons.
ESTS will establish a portfolio of research-led workstreams on:
Scenarios
- Enhancing use and usability of scenarios.
- Better understanding the limitations of scenarios, as well as the key sensitivities and uncertainties.
- Enhancing the application of scenarios in practice.
Stress Testing and Environmental-Financial-Economic Models
- Developing open analytical tools, based upon transparent approaches and asset-level data.
- Shaping future research and advancing techniques.
Capability and Learning
- Bring research into practice, helping stakeholder network to build research capability.
- Organise training programmes and provide exchange of knowledge, especially in emerging and developing countries.
This study investigates the transmission of carbon risk through supply chain networks and its impact on a firm’s implied cost of equity capital (ICOE), focusing on the Indian market from 2014 to 2024
This paper by Drs Abhinav Jindal, Ruben Kerkhofs and Gireesh Shrimali presents a forward-looking, location focused, technology-wise analysis of physical climate risks for Indian power companies using novel asset-level methodologies.
This paper by Dr Marcin Borsuk and Dr Gireesh Shrimali investigates how climate-related transition risks influence the creditworthiness of non-financial Indian firms. It shows that higher carbon emissions significantly increase credit risks, and impacts vary by firms’ financial health, ESG practices, investment strategies and physical climate risk exposure.
This study investigates the financial impact of climate transition risks for Indian power companies, using a forward-looking, microeconomic climate transition risk model.
This report by Alexandre C. Köberle, Abhinav Jindal, Shivika Mittal and Gireesh Shrimali explores the financial risks and broader economic implications of India’s push for transport electrification, highlighting gaps in climate and financial modeling.
An open, modular, and reproducible framework for the assessment of asset-level physical risk and the translation of these risks into portfolio-level impacts, including multiple financial transmission channels and spatial correlations between climate events.
This report examine risks to firms in the Indian economy from a cost-conscious shift towards renewable energy, focusing on two risk transmission channels: technological and policy risk.
This preprint discusses a compound effect of climate‑risk drivers on firms’ credit ratings. The authors (including CGFI’s Head of Transition Finance, Dr Gireesh Shrimali) find that the adverse impact of transition risk on credit ratings is greater for firms that are also exposed to physical hazards.
This paper, by CGFI Associate Fellow Raymond Pang, and Head of Transition Finance Research Gireesh Shrimali, uses a general network valuation model to consider financial contagion under climate transition risk.
Our proposed climate scenario taxonomy offers a valuable tool for enhancing the transparency, reliability, and applicability of climate scenarios in the financial sector. By addressing the existing gaps in understanding and documentation, this taxonomy can contribute to more effective risk management and sustainable financial practices.
Using a consistent climate stress test applied across eleven different climate scenarios under two different temperature targets and policy ambitions for a global set of power companies, this paper finds significant variation in the impact that each scenario has on the assessment of company valuation, and in the probability of default.
This publication by Associate Fellow Dr Chris Cormack, co-authored with Dr. Andrea Macrina, expands upon the Climate Contingent Convertible Bond (see below), introducing the sovereign CloCo (S-CloCo) which provides a mechanism to enhance climate transition funding. S-CloCo provides novel mechanisms to assist in reducing public debt burdens while operating alongside privately issued CloCos, implicitly providing an alternative monetary stimulus mechanism that can help stabilise sovereign ratings and drive further growth.
Potential climate risk impacts on sovereign credit ratings are far greater
than shown in previous studies. This paper shows impacts can be largely offset via investment in adaptation, and acute climate risk and adaptation can be quantitatively
incorporated into sovereign credit ratings.
This paper by CGFI Associate Fellow Chris Cormack (and Andrea Macrina) propose a novel financial product, the
climate-contingent convertible (CLoCo ) bond, whose financial structure permits firms to reduce the risk of de-
fault due to adverse climate transition policies over the
product’s lifetime.
This paper published by Z-Risk Engine (authored by CGFI Associate Fellow Dr Scott D. Aguais) presents a detailed approach for developing climate risk stress test scenarios that applies firm-level climate physical-and transition-risk sensitivities and introduces credit risk shocks into climate risk modelling.
This paper analyses the underlying interactions between input and output variables of three process–based climate–economy integrated assessment models according to a standardised sub- set of social and economic input variables, and how they contribute to variability in scenario outputs.
CGFI Chris Cormack and Gireesh Shrimali discusses the various general issues with climate risk modelling in financial institutions, including data availability and quality, model uncertainty, and integrating climate risks into risk management frameworks.
This CGFI discussion paper analyses empirical findings and current best practice to review the adequacy of climate risk scenarios for financial decision making.
This paper examines the potential impact of climate change on financial risk and the uncertainty surrounding the outcomes of different mitigation scenarios. The authors use a consistent climate stress test model to evaluate the effect of three possible net zero scenarios on companies’ valuations and financial investments.
This paper develops a climate stress test that translates climate transition risks affecting individual firms and economies to shocks affecting the financial system. As part of this, we present a forward-looking risk measure – TRISK – which is the expected loss of a financial institution given the uncertain materialisation of a transition stress scenario.
Gireesh Shrimali
Head of Transition Finance Research
Scott Aguais
Managing Director
Marcin Borsuk
Post Doctoral Research Associate
Matt Burke
Research Fellow
Dr Chris Cormack
Managing Director
Sebastian Werner
Head of Climate Risk Scenario Design
Dr David Kampmann
Career Development Fellowship
David Wilkinson
Climate Lead, Supervisory Risk Specialists Directorate
Abhinav Jindal
Senior Researcher and Energy Economist
Abhinav Jindal
Senior Researcher and Energy Economist
Ruben Kerkhofs
research scientist
Raymond Pang
Affiliate Senior Researcher
Raymond Pang
Affiliate Senior Researcher
Scott Aguais
Managing Director
Marcin Borsuk
Post Doctoral Research Associate
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OxSFG was established in 2012 and is a multidisciplinary research centre working to be the world’s best place for research and teaching on sustainable finance and investment. We work globally across asset classes, finance professions, and with different parts of the financial system.