The State Bank of Pakistan (SBP) has issued new Guidelines on Climate Stress Testing, formally bringing climate-related risks into the country’s financial stress testing framework. The move aims to help banks and regulated financial institutions better assess the impact of climate change on their portfolios and overall financial stability.
SBP noted that climate change has emerged as a growing challenge for Pakistan’s economy and financial system. The new guidelines introduce single-factor climate shock scenarios, covering both physical risks such as floods and heatwaves, and transition risks linked to policy and economic shifts toward low-carbon models.
According to SBP, “The guidance will enable regulated financial institutions to better gauge the impact of climate-related risks on their lending portfolios and financial position.”
Under the updated framework, all SBP-regulated financial institutions will be required to conduct climate stress tests in addition to existing stress testing exercises. These tests will be based on end-December data and submitted in the following year. The first round of climate stress testing is expected by Q3 of calendar year 2026, using data from December 2025.
Systemically important banks, identified as Domestic Systemically Important Banks (D-SIBs), must now integrate climate risks into their annual Macro Stress Testing (MST) exercises. The results will be included in their Internal Capital Adequacy Assessment Process (ICAAP) submissions to SBP.
SBP will also carry out its own in-house climate stress tests as part of its supervisory role and may require banks to adopt risk mitigation or contingency measures based on the findings. Supervisory teams will review the climate stress testing frameworks to ensure compliance and effectiveness.
The guidelines build on SBP’s existing stress testing framework introduced in September 2020, reflecting the regulator’s growing focus on climate risk management in line with global central banking practices.