The National Bank of Georgia (NBG) has completed its first climate stress test, evaluating the potential impact of climate-related risks on Georgia’s financial sector. This pioneering exercise assessed the effects of both acute physical risks, such as extreme weather events, and transition risks associated with the shift towards a low-carbon economy. The goal was to gauge the resilience of the banking sector in the face of climate-induced challenges and identify areas that may require strengthened risk management.

The Climate Stress Test Framework was developed with support from the European Investment Bank’s (EIB) Greening Financial Systems Technical Assistance Programme in cooperation with experts from EconLab. The project, which lasted over two years, concluded with in-person technical mission and a workshop for financial institutions, where the stress-testing framework and initial results were presented.

The climate stress test framework integrates multiple analytical modules to assess the economic and financial impacts of climate hazards. It examines key financial stability indicators, such as Non-Performing Loan (NPL) ratios and capital adequacy ratios, to evaluate the sector's resilience under different climate stress scenarios.

The results highlight the potential vulnerability of the financial sector to climate risks. Extreme precipitation, identified as a major acute physical risk, was found to have the most significant impact on NPL ratios. Meanwhile, the transition and chronic physical risks modeled through a delayed transition scenario resulted in capital adequacy ratios remaining below the baseline scenario over a three-year period, highlighting the financial strain that prolonged climate risks can impose on capital buffers. Despite these challenges, the banking sector remains well-capitalized and resilient, demonstrating its preparedness to manage such risks.

The findings underscore the importance of ongoing climate risk monitoring and the need for proactive policies to ensure that Georgia’s financial sector is equipped to handle future climate-related shocks. By enhancing its sustainable finance framework, the NBG aims to strengthen the financial sector’s ability to support Georgia’s sustainable development and navigate the complexities of a low-carbon transition.