Climate stress testing is becoming an increasingly important part of financial supervision. Yet for many supervisors, particularly in developing markets, the challenge is no longer recognising climate risk but translating it into a practical supervisory framework that reflects local circumstances, available data and institutional capacity.
An African financial supervisor sought to strengthen its understanding of how climate-related risks could affect the resilience of its financial sector. Having already taken important steps in sustainable finance and climate risk awareness, the institution wanted to move from policy ambition to a structured supervisory tool that could support future oversight across banks, insurers and microfinance institutions.
Effective climate stress testing requires more than applying international scenarios. It depends on translating climate hazards and transition pathways into meaningful financial risk indicators while remaining proportionate to the maturity of the financial system and the quality of available data.
The objective was to develop a technically sound and practical stress-testing framework that could support supervisory learning without creating a false sense of precision. Key questions included:
how global climate scenarios could be adapted to the national context;
how different types of financial institutions could be incorporated within a single exercise;
how physical and transition risks could be connected to financial risk transmission channels.
RiskSphere developed a proportionate climate stress-testing framework tailored to the country's financial sector. The methodology combined internationally recognised climate scenarios with a tailored acute physical risk scenario reflecting the country's exposure to severe weather events and their economic impact.
Practical modelling pathways translated high-level climate narratives into measurable impacts, linking climate hazards and transition drivers to macroeconomic outcomes, sectoral vulnerabilities and financial risk indicators, including credit risk, portfolio exposure, insurance claims and institutional resilience.
Recognising the diversity of the financial sector, separate but connected conceptual models were developed for banks, insurers and microfinance institutions. The project also delivered practical tools, templates and analytical frameworks that could be used by both the supervisor and participating institutions. Throughout the engagement, the methodology remained guided by proportionality, transparency and supervisory relevance, with data limitations explicitly documented and reflected in the interpretation of results.
The pilot provided a structured assessment of how climate-related risks could affect the financial sector under a range of future scenarios. More importantly, it established a practical foundation for integrating climate risk into supervisory practice and financial stability monitoring.
The project delivered:
A scenario-based climate stress-testing framework;
Climate risk narratives covering chronic physical risk, transition risk and acute physical risk;
Conceptual models linking climate drivers to financial risk channels;
Practical supervisory tools and analytical templates;
Initial insights into sector-level vulnerabilities across banks, insurers and microfinance institutions;
A stronger basis for future supervisory engagement on climate-related risk.
Rather than treating climate stress testing as a purely technical modelling exercise, the project positioned it as a supervisory learning instrument that supports better data, stronger institutional capacity and the gradual integration of climate risk into financial supervision.
RiskSphere helps financial institutions, supervisors and development partners turn climate and sustainability risks into practical frameworks, analytical tools and informed decision-making.
Get in touch to explore how we can support your climate risk, stress testing or sustainable finance objectives.