4.3. Proportionality

Institutions should focus their scenario analyses on material environmental risks. To carry out their materiality assessment, institutions should refer to the Guidelines on the management of ESG risks.

The degree of sophistication, scope and frequency of the scenario analysis should be commensurate with the materiality of environmental risks, the current state of development and maturity of available methodologies and practices, the institution’s internal capabilities (taking into account its size, business model and the complexity of its activities), as well as the expected benefits of the exercise. Where detailed quantitative approach would be disproportionate to the institution’s capabilities or expected benefits, institutions could consider a simplified approach. In this respect, and where justified in relation to the materiality of the risks:

• d. SNCIs may rely on a predominantly qualitative approach for both short and longer-term scenario analysis.
• e. Institutions other than large ones and other than SNCIs may use sensitivity analysis to test their short-term financial resilience to adverse environmental factors. For the long-term resilience analysis, they may rely on a predominantly qualitative approach.
• f. For large institutions, a simplified approach may be envisaged in the context of medium to long-term resilience analysis and of non-climate environmental risks, where sensitivity analysis could serve as an initial step. As their understanding and capabilities in managing FINAL REPORT ON GUIDELINES ON ENVIRONMENTAL SCENARIO ANALYSIS

environmental risks advance, they are expected to progressively integrate more sophisticated quantitative approaches. FINAL REPORT ON GUIDELINES ON ENVIRONMENTAL SCENARIO ANALYSIS