On July 15, the IIF and ISDA submitted a comment letter to the Basel Committee on Banking Supervision's (BCBS) Discussion Paper on ‘The role of climate scenario analysis in strengthening the management and supervision of climate-related financial risks.'

IIF and ISDA members welcome the BCBS’s work to promote a common understanding of and approach to the design and use of Climate Scenario Analysis (CSA), including Climate Stress Testing (CST) approaches.

CSA exercises, including supervisory exploratory exercises, can play an important role in enhancing understanding of the dynamics of climate-related financial risks on different time horizons. Banks across the world are increasingly using CSA as one input to a range of applications, including to inform risk assessment and management processes. In particular, CSA can support the identification and measurement of potential climate-related physical and transition risks, over different timeframes. As the BCBS has recognized in the DP, CSA practices are at an early stage of development and remain a highly complex and challenging pursuit with numerous limitations. Some of the challenges stem from the fact that climate-related financial risks are highly uncertain and difficult to measure, with the nature of the potential shocks differing across regions and banks’ lines of business.

The IIF/ISDA comments respond to the BCBS's questions about, among other things, the potential objectives of CSA, key challenges, areas where methodologies and capabilities need to develop and how the effectiveness and efficiency of CSA exercises could be improved.

IIF and ISDA members would encourage the BCBS, and jurisdictional central banks and supervisors, to engage actively and transparently towards a common understanding and more coordinated approach to supervisory CSA exercises as well as supervisory engagement with banks’ own exercises. Providing consistent guidelines for supervisors across the world could enhance the effectiveness, efficiency, and comparability of supervisory exercises.