Nuances and pitfalls for banks developing climate change scenarios

Risk management groups must interpret a range of scientific taxonomies to navigate the maze of definitions and possibilities is the first step in this mission-critical journey


Welcome to Emerald Pathways, the second e-book in the GreenPoint Financial series on financing sustainability.

The first e-book, Code Red, focused on explaining the higher aims of the world of green finance. This included circular economies, COP ambitions, and concerns around built-in challenges such as supply chains and UN definitions of ‘Responsible Banking’.

This series, Emerald Pathways, is more orientated towards the exploration of the nuances of climate change as an emergent risk type. CO2 is often used as a catch-all term for Greenhouse Gases (GHG), but some questions need to be considered, such as:

  • How is carbon priced, and what does CO2e mean?
  • What is the ‘Carbon Budget’ and how does it influence policy and policy prioritization?
  • What do ‘Carbon Intensity’ numbers refer to, and how can banks navigate them for their own reporting requirements?
  • How do ‘Border Carbon Adjustments’ mitigate regulatory arbitrage and prevent carbon leakage?

Complexity is unavoidable when merging rapidly evolving science with established banking reporting standards and differential regional climate plans. But that complexity must become part of every bank’s risk management framework.

System thinking must replace well-worn historical analysis as impacts on the real economy, and therefore on the risk profiles of bank customers, are forecast and costed. This has to include:

  • The role of stranded assets in the credit profiling process
  • Taxonomies that govern official definitions of sustainability
  • The intersection of public and private finance
  • The role of innovation funds in the fight against climate change

The following articles look into these issues, from the perspective of financial risk management. Banks are crucial to the process of mobilizing trillions of dollars of private money towards the adaptation of businesses and infrastructures in the face of and mitigation of, climate change. Working in the context of current regulations around risk reporting and capitalization, bankers must understand the nuances and complexities, and use them to create viable scenarios that are capable of supplying the detailed analysis needed to price green loans and incentive sustainable businesses.

This e-book is intended as a start point in the sustainability journey for banking professionals – an introduction to green finance and its many embedded and interrelated topics.