On 5 November 2025, the Sino-German Cooperation on Climate Change – Climate Partnership (KP4) project co-hosted a workshop on climate stress testing together with the UK–China (Guangdong) CCUS Center. The workshop brought together representatives from the Ministry of Ecology and Environment (MEE), the National Financial Regulatory Administration (NFRA), the Foreign Economic Cooperation Office (FECO), the Financial Union, the China Banking Association and financial institutions.
Climate stress testing refers to methods used by banks and financial institutions to assess their resilience to physical risks (such as extreme weather events or sea-level rise) and transition risks (such as those associated with the shift to a low-carbon economy). As global climate change accelerates and extreme weather events become more frequent, while countries intensify their transition efforts, the importance of climate stress testing for the financial sector continues to grow.
China has committed to reaching peak carbon dioxide emissions before 2030 and achieving carbon neutrality by 2060 to combat climate change. In pursuing these goals, the country will encounter substantial climate-related transition risks. Thus, it is necessary to develop a scientific, concise, and forward-looking transition risk stress testing methodology.
In recognition of this, the UK–China (Guangdong) CCUS Center carried out a methodological study on climate risk stress testing on behalf of KP4. The study introduced carbon emission forecasting and transition capability analysis into the stress testing framework, conducting a dynamic stress test covering the period 2024–2030 with eight pilot banks participating in this test. During the workshop, the results of the study and pilot stress test were presented and discussed among participants.
Key results and recommendations of the study
The study highlights that particularly transition risks are expected to have a significant impact on the financial sector, making regular and efficient stress testing increasingly important. The report’s findings were based on field investigations at financial institutions, the construction of a relevant database, and the development and optimisation of a climate transition risk model. Additionally, the study emphasised the need to adjust and optimise the climate risk stress test tool based on the bank pilot results and feedback.
During the research, the following main challenges to effective stress testing were identified:
1. Data access issues:
- Financial institutions often receive data that is fragmented, or inconsistent in scope. More so, data is updated infrequently, often failing to capture real-time risk conditions.
- International scenarios (such as IPCC models) are not always aligned with China’s context. While foreign stress tests typically look several decades ahead (to 2040–2050), China’s stress tests often use much shorter time horizons (sometimes only 3–5 years).
2. Carbon emission data & stress-testing methodology:
- There is insufficient carbon emissions data, partly because no single regulator or financial institution centrally evaluates enterprises’ transition capacities.
- Complex and multilayered risk transmission pathways complicate assessment and modelling while limited understanding of scenario probabilities leads to weaker foundations for stress-testing outcomes.
In response to these difficulties, the study formulates several recommendations, such as establishing unified models and standards for all financial institutions, along with improving and opening databases through financial authorities. Additionally, incorporating more policy instruments, such as converting non-carbon market policies into equivalent carbon taxes, is suggested. Expanding stress testing models to cover insurance, securities, and fund management institutions is also important, as well as conducting stress tests for new projects and clients alongside existing assets using the national carbon evaluation framework. Finally, integrating both non-carbon market and carbon tax policies into stress testing frameworks will help capture their conversion effects and provide more comprehensive risk assessments.
Insights and suggestions from financial institutions
During the discussion session, representatives from financial institutions shared their hands-on experience with applying climate stress tests, emphasising the need to integrate China’s national conditions with international best practices. More so, they highlighted that recent competition among banks has positively influenced the industry by strengthening practitioners’ capabilities in green finance. The experts recommended further improving the carbon-price transmission model and data-sharing mechanisms to enhance the accuracy and practicality of stress testing.
It was also noted that last year, financial institutions began conducting voluntary stress tests on a regular basis. However, the focus of these tests varies across institutions: banks tend to concentrate on transition and default risks, while insurance companies focus more on impacts on pricing and settlement. More so, small and medium-sized banks face limitations in terms of data and technical capacity. To alleviate this barrier to participation, it was suggested to develop simplified tools.
Looking ahead, representatives from Chinese financial institutions proposed ways to improve climate stress testing in China. One key suggestion was to enhance cooperation among banks. Since total national carbon emissions are fixed by policy, it is inefficient for every bank to conduct identical stress tests based on the same emission totals. Moreover, as all financial institutions face similar challenges, particularly the lack of reliable data, collaboration could help expand and improve the shared data pool. Participants also recommended integrating more macroeconomic factors into stress-testing models. While an enterprise’s operations influence its financial performance, broader macroeconomic conditions also play a critical role and should therefore be included in future assessments.
In their closing remarks, Mr. Ding Hui, board member of the MEE’s FECO; and Ms. Qi Lan, co-lead of the climate team at GIZ in China, emphasised the growing importance of climate change for financial institutions. They pointed out that the study’s findings could help strengthen regulatory frameworks and guide the development of more effective stress-testing guidelines for China’s banking sector.
