Enhancing climate risk management

The start of the decade marks a significant shift in European regulatory and supervisory views on climate change and sustainability.  Climate risk is recognised to have financial consequences that affect existing risk types (e.g., credit risk, operational risk, reputation risk) by central banks, the EBA, EIOPA and national competent authorities such as ACPR in France and the PRA in the UK.

Climate Risk Management at Financial Firms

– Climate risk management is generally in its infancy.
– There is a disconnect between firms’ climate risk management self-assessment and what they actually do.
– Only 50% of firms currently use scenario analysis for climate risk management, mostly on an adhod basis”.

Source: GARP Risk Institut, 2019

Climate risk forward-looking models and scenario analysis

Although data limitations and methodological challenges are known, regulators expect that material climate change and sustainability risks are identified, quantified using forward looking models, scenario analysis and stress tests.  Translating climate risk models into financial models, documenting, validating new models and model risk, formulating data requirements, enhancing analytical capabilities will take time and require resources over the next years.  

A process for applying scenario analysis to climate-related risks and opportunities 

Source: Adapted from TCFD, Technical Supplement | The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities

How can we help:  A framework for assessing and climate risk management.

Climate and sustainability risks are gradually expected to be reflected in institutions’ risk management frameworks.  We can assist your team design and/or perform a maturity assessment,  compare current practices to regulatory expectations and establish a roadmap for alignment for the following dimensions:

  • Risk assessment, materiality and prioritisation of “high risks”.
  • Models, Scenarios and Stress Tests: quantification of material climate risks, scenario analysis, stress testing, and model risk management.
  • Impact on Business Strategy, Capital (ICAAP) or Solvency (ORSA), and Risk Appetite (RAF).
  • New data and disclosure requirements for EU’s TCFD and Pilar 3 disclosures, climate metrics and targets, scenario analysis.
  • Revisions to front-to-end processes (e.g. credit underwriting, investment screening and investment allocation, reporting and controls).