Climate risk

Climate change is recognised as a serious threat to financial institutions and the stability of the global financial system. Unfolding physical risks together with increasing regulatory expectations pose challenges to how banks management their risk exposure. To respond to these developments, banks will have to build their capabilities in identifying, quantifying, and disclosing their exposure to climate risks and incorporate climate change consideration within their traditional financial risk management.

External scrutiny, corporate values and financial impact are driving banks to address new challenges across business functions:

• CEO and Board: strategy and governance
  • Ensure board can provide oversight of climate related risk and opportunity.
  • Define and implement business strategy that considers actual/potential impact of climate risk and business opportunity.
• CRO: risk identification, regulatory stress test and capital
  • Risk identification relating to climate risk.
  • Quantify impact of climate risk on asset portfolios & economic/regulatory capital.
  • Perform stress tests.
  • Monitor climate-related risk to business solvency and capital.
  • Implement risk mitigation for climate risk.
• CFO: regulatory and financial reporting
  • Ensure regulatory and financial reporting includes impact on climate risk.
  • Produce and monitor business plan aligned with business strategy that reflects impact from climate risk.
• CIO: asset allocation and security selection
  • Design sustainable and green investment strategy that meets business objectives.
  • Set top-down and bottom-up climate metrics.
  • Ensure they can report climate risk on investment portfolios by incorporating climate data into asset allocation and investment selection.

We provide a holistic climate risk service offering covering:

• Governance:
  • Capability building around climate risk at the Board and Senior Management level.
  • Development and review of Climate-Related & Environmental (CR&E) risk management framework.
  • Development of appropriate key risk indicators and limits for CR&E risks.
  • Ensure regulatory compliance against climate risk management expectations through gap analysis and roadmap preparation.
• Strategy:
  • Transition plan design.
  • Climate risk appetite set up.
  • CR&E factor integration into business decision making.
  • Strategy and business planning.
• Risk management:
  • Scenario analysis and design.
  • Stress testing.
  • Importance of granular data.
• Metrics and targets:
  • Statistical modelling for transition and physical risk integration into credit, market and liquidity risks.

• Disclosure and reporting

Case study: CliMate

Introducing our in-house Climate Risk Assessment Tool CliMate, a solution designed to empower banks in navigating the complex landscape of climate risk. This tool is crafted to evaluate the impact of both transition and physical risks on credit risk, leveraging data from banks’ portfolios:

• Portfolio Explorer: this module supports risk identification and assessment by providing key climate performance indicators. It quantifies the carbon footprint of banks’ portfolios, offering insights into their contribution to climate change. It also measures exposure to high-risk sectors such as fossil fuels and high-risk locations, enabling banks to understand the potential physical risks affecting specific assets.

• Scenario Explorer: this feature allows banks to dive into various transition scenarios used for climate risk stress testing. The adaptability of CliMate ensures it can cater to a wide range of scenarios, providing flexibility to best fit the needs and requirements of each bank.

• Results Explorer: this functionality enables banks to view the stress test outputs on credit risk, including expected credit loss calculations for transition risk on corporate portfolios and physical flood risk assessments for mortgage portfolios.