Climate scenario analysis has been an area of increasing focus for banks and financial institutions in recent years. Firms need a better understanding of the short- and longer-term financial risks associated with climate change, especially given the changing regulatory landscape and increased focus on mitigating the direct impact of climate-related risks. Climate scenario analysis for the trading book poses a particular set of challenges, given the need to develop bespoke, short-term scenarios that include a detailed set of market risk factors.

In response to these challenges, ISDA has engaged in a multi-phase project to develop a framework for climate scenario analysis for the trading book. The two main factors that differentiate ISDA’s work from previous efforts are the focus on very short-term horizons that are applicable to the trading book and the proposed calibration of market risk factor shocks for each scenario.

In 2023 and 2024, ISDA published detailed papers covering Phase 1 and Phase 2 of this initiative. This paper sets out the work completed during Phase 3 and has two components: a survey to assess industry progress and operational readiness; and an expansion of the market risk factors for the transition risk scenario developed in Phase 2.