Aspect Advisory

Climate Related Financial Disclosures and Stress Testing

Overview

A leading financial institution sought to strengthen the quality and maturity of its climate-related financial disclosures in alignment with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. As a London Stock Exchange (LSE)-listed entity, the bank was required to comply with TCFD-aligned disclosure obligations, making accurate and transparent climate reporting a strategic and regulatory priority.

Additionally, the bank aimed to enhance its Climate Stress Testing and Scenario Analysis to better understand and mitigate climate-related financial risks.

Aspect Advisory was engaged to conduct a comprehensive review and analysis of the bank’s climate strategy, ensuring alignment with TCFD guidelines while identifying opportunities for further enhancement. The objective was to improve the bank’s resilience to climate risks, expose potential vulnerabilities, and refine Environmental, Social, and Governance (ESG) reporting to meet evolving regulatory expectations. 

Solution

Aspect Advisory implemented a structured approach to strengthen the bank’s climate risk management framework:

1.Climate Stress Testing & Scenario Analysis:

  • Designed and conducted a climate stress test exercise to evaluate the bank’s resilience under extreme climate scenarios.
  • Assessed potential vulnerabilities that could lead to financial distress or insolvency.
  • Modeled the impact of physical and transition risks, incorporating factors such as regulatory shifts, carbon pricing, and climate-related natural disasters.

2. Strategic Alignment with TCFD Guidelines:

  • Reviewed the bank’s existing climate action strategy and provided targeted recommendations for improvement.
  • Strengthened the alignment of the bank’s disclosures with TCFD’s core pillars: Governance, Strategy, Risk Management, and Metrics & Targets.

3. Enhanced ESG and Climate Reporting:

  • Developed a structured ESG reporting framework to improve transparency and compliance.
  • Provided insights on best practices for integrating climate risk assessment into financial disclosures.

Results

The collaboration led to significant advancements in the bank’s climate risk framework:

  • Deeper Insights into Climate Risks:
    • The stress test results provided a quantified understanding of the impact of severe climate scenarios on the bank’s financial position.
    • Identified key risk areas affecting solvency, profitability, and financial stability.
  • Enhanced Climate Resilience & Strategic Decision-Making:
    • Enabled the bank to proactively address vulnerabilities and enhance its risk mitigation strategies.
    • Strengthened integration of climate risks into corporate governance and strategic planning.
  • Improved TCFD-Aligned Reporting & Regulatory Compliance:
    • Developed an enhanced ESG reporting framework in accordance with TCFD guidelines, ensuring compliance with regulatory and investor expectations.

Key Insights & Industry Trends

1.Climate Stress Testing is an Emerging yet Complex Discipline:

  • Globally, financial institutions and regulators are in the early stages of developing climate stress testing capabilities.
  • Methodologies continue to evolve as data quality, scenario modeling techniques, and regulatory expectations mature.

2. Stress Test Outcomes Influence Business Models & Governance:

  • The results of climate stress tests are not just risk management tools—they are pivotal in shaping strategic decisions, capital allocation, and internal governance structures.
  • Financial institutions that proactively integrate climate risk considerations into their business models are better positioned to navigate the transition to a low-carbon economy.

3. ESG & Transition Planning Are Now Business Imperatives:

  • Regulatory bodies and investors increasingly expect robust climate risk disclosures.
  • Banks that fail to address transition risks may face financial and reputational consequences.

Business Areas Impacted

  • ESG Strategy & Reporting
  • Risk Management & Stress Testing
  • Regulatory Compliance & Governance

Aspect Advisory’s expertise enabled the bank to move beyond compliance-driven reporting, fostering a proactive and strategic approach to climate risk management. By leveraging climate stress testing insights, the bank enhanced its long-term resilience, governance, and ESG strategy, positioning itself as a leader in sustainable finance.