Helping banking industry address climate-related risks, opportunities

present to their lending portfolios.

Using detailed scenario data from the models MESSAGEix-GLOBIOM (IIASA) and REMIND-MAgPIE (PIK), financial analysts developed ‘risk factor pathways’ for individual economic sectors in different world regions. Three scenarios were used in the project: a baseline, and deep decarbonization pathways consistent with 2 and 1.5°C warming. These scenarios were developed within the context of the ongoing European Commission Horizon 2020 research project ‘CD-LINKS’, which is coordinated by IIASA (www.cd-links.org). A forthcoming paper by McCollum et al. describes the scenario design and key model results related to energy investments.

“Bridging the gap between financial models and climate mitigation scenario models is not immediately straightforward. That’s why this pilot project with the banks is so important. The scientific community is starting to interact more closely with non-state actors, but more can and should be done,” says David McCollum, Senior Research Scholar, Energy Program, IIASA.

The methodology is designed to:

·                  Build upon existing risk assessment expertise, procedures, and models already used by banks;

·                  Enable informed assessments of how risk exposures – and new potential opportunities – might develop in the future, under various climate mitigation scenarios;

·                  Allow institutions to examine risk and opportunities across a range of geographies and sectors, and

·                  Provide longer-term insights that go far beyond the usual stress-testing horizon of 2-3 years.

The progress made through the publication of this framework is foundational. “Through this highly collaborative effort of scientists, risk practitioners and sustainability experts, we have set forth an innovative methodology that will serve to underpin enhanced climate-risk aware decision making and resource allocation,” said John Colas, Oliver Wyman, Partner and Vice Chairman, Financial Services Americas. “We expect that this methodology will be further strengthened, as practices evolve and new and more granular data emerges from industry practitioners, corporates, policy makers, and climate scientists.”

Additional work is still needed across sectors and areas of expertise to develop best practices. Most publicly available scenarios are not intended for financial risk assessment. Together the scientific community and financial institutions could improve the granularity of the models and advance the financial risk variables generated. There will also be value in banks and borrowers engaging so that enhanced borrower-level information becomes available. Like the development of macroeconomic stress testing at financial institutions, forward-looking climate assessments and disclosures will continue to improve over time.

“When we published our recommendations less than a year ago, we were deliberate in viewing banks and other financial institutions not only as consumers of climate-related disclosures, but also as preparers and issuers of such disclosures. We did so to emphasize the key role that financial institutions will have to play in both safeguarding financial stability and financing economic decarbonisation,” said Christian Thimann, UNEP FI Co-Chair, TCFD Vice-Chair, and Senior Executive at AXA. “That is easy to understand. The hard part is finding effective yet practical ways for financial institutions to take such action, to carry out the required assessments, and to meaningfully disclose. I am thankful for the contribution that this group is today making to that effect.”

The methodology will be available at this URL: www.unepfi.org/tcfd-for-banks

IIASA notes that webinars will be held at 10.00 CEST and 16.00 CEST on 15th May for those interested in hearing more about the new methodology. Speakers will include risk and investment management experts from Oliver Wyman, climate scientists from the Potsdam Institute for Climate Science (PIK) and the International Institute for Applied Systems Analysis (IIASA), and representatives from the participating banks.