Climate scenario analysis has become a useful tool for banks and financial institutions to understand the short- and long-term financial risks associated with climate change, particularly in light of evolving regulations and an increased emphasis on reducing the impact of climate-related shocks.

ISDA has developed this paper to support banks as they seek to address the challenges of climate scenario analysis for the trading book. The paper includes a review, from a trading book perspective, of the short-term scenarios recently published by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), and it provides a set of market risk shocks consistent with two of those NGFS scenarios.

The NGFS published the first iteration of its short-term scenarios in May 2025, providing a valuable addition to existing climate scenarios, which are mainly longer-term. The short-term scenarios enable banks to consider how climate risks might impact their businesses over a three- to five-year horizon, rather than a 30-year horizon. All scenarios involve a range of assumptions and this paper includes a review of the scenarios to help users understand any gaps, limitations or uncertainties associated with the scenarios.

In order to make these scenarios more useful from a trading book perspective, the paper proposes a corresponding set of market risk shocks. These shocks are designed to translate the multi-year NGFS scenarios into market risk shocks for the trading book, while maintaining alignment with previously published ISDA market risk frameworks and shocks.

The paper builds on the work ISDA has been doing in recent years, in close collaboration with more than 30 banks and supported by Deloitte. In 2023, ISDA published a conceptual framework for climate scenario analysis in the trading book. Insights from a comprehensive survey of more than 25 banks informed the successful piloting of three short-term climate scenarios – a physical risk scenario, a transition risk scenario and a combination of both – which were published in a second paper in 2024. Last year, ISDA published a third paper that expanded the initiative to include four new regions and additional market risk factor shocks (for the transition scenario), coupled with an updated survey to evaluate banks’ operational readiness.