Building Back Green - Climate Risk Management
The first live GreenCap event was held on March 3. The webinar was a lively discussion around the nuances and pitfalls involved with creating climate scenarios for risk management. Scenarios are key to risk management but interpreting real-world climate pathways such as the ones produced by the IPCC presents specific challenges.
The session included discussions on carbon terminology, from carbon budgets to carbon intensity. It also included the kind of market indicators that risk managers can use, in conjunction with climate pathways and government policy aims, to create effective climate scenarios that can be used meaningfully within the bank.
- Banks are at the heart of risk intermediation and the financial system, to address climate change.
- Banks are constantly challenged to manage climate change uncertainty, evolving regulations and their impact on new loans and existing portfolios.
- GREENCAP is a comprehensive platform that equips banks to proactively manage their lending and loan portfolio risks.
- GREENCAP bridges the gap between the physical impact of climate change and its resulting credit risks.
- The platform is designed to quantify climate change risks aided by several analytical models.
- GREENCAP ensures that banks manage climate change risks at individual loan portfolio and institutional levels.
- The reporting requirements for banks’ green loan portfolios are becoming increasingly rigorous.
- This responsibility rests with Loan Officers, Chief Sustainability Officers and Chief Risk Officers.
- GREENCAP enables banks to seamlessly assess, strategize, and monitor their lending pipelines and sustainability limits.
Climate Change Data Resources
- Factors underlying financial climate risk analysis are complex and evolving, as governments enact regulations and other mitigation measures.
- Banks require a system that incorporates projections (physical impact), based on possible government actions (transition impact) and private businesses or individuals (adaptation).
- Based on this, central bankers and institutions can create financial cost/loss estimates for potential pathways, while governments and institutions can draft policies to meet commitments.
- Businesses are then analyzed commensurate with their adaptation to physical and transitional impacts.
- Together, these data sets form the inputs required to forecast potential losses and the resulting credit deterioration.
- Climate change financial risk assessment should flexibly incorporate multiple scenarios, as government policies and regulations change.
Aiding regulators by gauging the impact of the climate change and mitigation policy to assess credit risk across the financial industry, stress testing, evaluating risk capital and projecting returns.
- Individual Banks
Assisting CROs and SROs with a resilient risk evaluation approach that views the balance sheet by ‘greenness’, determine the expected RWA change and set green targets while maintaining profitability.
- Client Level
Helping Loan Officers evaluate loans and portfolios of clients with a Yes/No resiliency result approach, calculating incremental GRWA changes and testing against green targets.