Sixteen of the world's leading banks collaborate to tackle physical risks of climate change
By Will Bugler
Sixteen leading banks, UN Environment Finance Initiative (UNEP FI) and Acclimatise, have published new methodologies that help banks understand how the physical risks and opportunities of a changing climate might affect their loan portfolios.
The methodologies, published in the report “Navigating a new climate”, were piloted across three climate-sensitive industry sectors: agriculture, energy and real estate. Using the methodologies, banks can begin to assess physical climate risks in their loan portfolios, evaluating the impacts on key credit risk metrics – Probability of Default (PD) and Loan-to-Value (LTV) ratios. The forward-looking assessments offer longer-term insights that go beyond the usual stress-testing horizon of 2-3 years.
“This report provides a practical way to assess the physical risks of climate change, which we have piloted on our real estate mortgage portfolio to consider how flood risks could impact Barclays’ customers now and in the future,” said Jon Whitehouse, Head of Government Relations & Citizenship, Barclays, “this type of assessment helps us to manage climate change risk and opportunity, both at a transactional and portfolio level.”
The methodologies are designed to enable banks to be more transparent about their exposure to climate-related risks and opportunities, in line with the recommendations of the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD).
“The physical impacts of climate change may pose a risk to banks’ loan portfolios. The innovative methodologies…provide foundations which can be built upon, as research and data analytics improve,” said Acclimatise’s Chief Technical Officer, Dr Richenda Connell. “Once banks understand the scale of the risks, this will be a milestone that will encourage other corporates to take climate risk management seriously. Building resilience to physical climate impacts also presents banks with investment opportunities. Those that understand this best will have a competitive advantage.”
The methodologies demonstrate that physical risks will worsen if the global economy continues on its current greenhouse gas emissions pathway. Future negative impacts could be reduced somewhat, but not avoided completely, if strenuous and rapid efforts are made globally to cut emissions.
The guidance also aims to inform banks’ strategies to support clients in adapting to changing conditions. Clients who face physical risks may need to make investments to become more climate-resilient. What’s more, global markets are developing for providers of climate-related products and services, as companies such as engineering and technology providers are identifying opportunities to capitalise on shifting market trends. Banks may have opportunities to support these investments.
A separate, complementary report focused on the assessment of transition risks and opportunities, was published in April.
“For financial institutions and other market actors, effectively managing and responding to climate change always means two things: understanding and responding to the intensifying physical impacts of unavoidable climate change; and also mitigating the risks and seizing the opportunities from the decarbonisation of the economy,” said Eric Usher, Head of UNEP Finance Initiative.
“We are proud of our collaboration with these 16 leading banks and Acclimatise in the development of methods and tools that will help the global financial industry respond to climate change in a holistic manner, spanning both the physical and transition dimensions of the challenge.”
The banks leading this work and currently piloting the methodologies are ANZ, Barclays, BBVA, BNP Paribas, Bradesco, Citi, DNB, Itaú Unibanco, National Australia Bank, Rabobank, Royal Bank of Canada, Santander, Société Générale, Standard Chartered, TD Bank Group and UBS.
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