Climate-related risks, encompassing both physical and transition risks, could pose a significant threat to financial stability. Physical risks, such as extreme weather events (e.g., extreme precipitation and wind events) could cause an immediate and severe disruption of economic activity, while transition risks, associated with the shift towards a low-carbon economy, could result in long-term structural changes to the economy. Both types of risk have the potential to adversely impact asset values, increase credit risk, and disrupt the functioning of financial markets, thereby threatening the stability of the financial system.

Therefore, it is crucial for financial authorities to systematically assess climate-related risks to ensure that financial institutions are prepared for potential adverse impacts. Stress testing serves as a vital tool in this assessment process, enabling the evaluation of the resilience of banks and other financial entities to various climate-related scenarios. The National Bank of Georgia has developed a comprehensive Climate Stress Testing Framework that integrates multiple analytical modules to assess acute physical risks, as well as transition and chronic physical risks. The framework has been developed in accordance with international standards, which contributes to the reliability of the results derived from the stress tests.

The NBG’s Climate Stress Testing Framework employs a top-down approach, utilizing its existing stress testing methodology and incorporating various satellite models and tools. In the assessment of climate-related vulnerability, this framework evaluates risks at the level of both household and corporate portfolios.