The aim of the GreenCap system is to provide a meaningful economic impact analysis of climate change to the bank.
The solution takes the loan portfolio from the bank and applies multiple climate scenarios, mapped by the economic impact services team, to compute the expected increase in Risk-Weighted Assets (RWA) that would be expected as a result of that scenario. This impact is important in itself, as an increased requirement for risk capital directly decreases P&L as less capita is deployed profitably in the market.
Additional economic impact research is provided by GreenCap in the form of loan pricing. This calculation converts the RWA number into Basis Points (BPS) per credit facility that would be required for the additional risk to be properly taken on by the borrower. The BPS are a crucial result of the system.
- Banks can price commercial loans in a way that rightly incentivizes more sustainable business practices
- Green loan pricing can be based on established credit risk methodologies, with risk spreads being based on a ‘Basel Committee on Banking Supervision’ (BCBS) foundation
- Banks can align their public ambitions around green finance with their P&L projections through ‘best economic impact analysis’
Climate resiliency, though, is more than a single economic impact, instead, being a measure of how well a bank is likely to respond to climate change.
GreenCap provides a resilience score at the portfolio level, by performing the economic impact analysis on how green or brown (measured as a function of each loan’s exposure to transitional climate policy) the portfolio is, on a weighted basis.
Once the economic analysis of the current balance sheet is completed, GreenCap then allows users to set targets and run sustainability strategies across its loan book.
The combination of multiple strategies, user-defined targets, and established credit calculations is designed to provide banks with a full analysis of their climate-related risks.