Climate-related and environmental risks and the corresponding challenges will have important consequences to various aspects of our lives. Banks are expected to play a major role in for instance financing the transition to a sustainable economy and society.
The European Central Bank (ECB) as well as an increasing number of national regulators and supervisors expect banks to have climate risk considerations integrated in their risk measurement toolkits, stress testing frameworks and practices.
Risk measurement is an important building block of profound risk management systems, and the unique nature of climate risks requires the use of various novel methodologies.
Gap analysis and implementation plans
Assessing your current practices, formulating and implementing action plans to remediate any shortcomings identified in the ECB Climate Stress Test.
Climate stress testing and scenario analysis
Designing relevant climate scenarios and performing regulatory and internal stress tests (e.g. ICAAP) to assess the impact of climate risk drivers.
Dynamic portfolio rebalancing
Implementing a dynamic balance sheet approach to rebalance your portfolio composition based on scenario narratives, your strategy and business insight.
Physical and transition risk measurement
Assessing your portfolio’s vulnerability to physical and transition risks, and integrating climate risk factors into your toolkit such as (shadow) PD / LGD models.
Risk identification and monitoring
Developing climate risk warning indicators and other Key Risk Indicators (KRIs) for risk identification (screening criteria) and/or portfolio monitoring purposes.
Portfolio alignment and target setting
Measuring your portfolio alignment with respect to various climate transition pathways, and assisting you in your climate target setting process.
Christophe Caers is a Senior Consultant based in Finalyse Brussels with experience in climate risk management. He has been involved in the validation of the 2022 ECB climate stress test methodology at a large Belgian bank and the assessment of ESG scorecards. Christophe is a certified Financial Risk Manager (FRM) and holder of the GARP’s Sustainability and Climate Risk (SCR) certificate.
Milenko Petkovic is a Senior Consultant with more than 9 years of experience in risk management. Milenko’s area of expertise lies within the development and validation of credit risk models, ESG scorecards and climate risk stress testing, including transition and physical risks. Milenko is an active member of Finalyse Climate Risk Centre of Excellence and GARP’s Sustainability and Climate Risk (SCR) candidate.
Veronica Mazza is a Senior Consultant with more than 4 years of experience in credit risk management. She has been involved in the development of the 2022 ECB Climate Stress Test for a large European Bank, including both the physical and transitional risk exercises. She is currently working on the design of the Physical Risk assessment within the Finalyse Climate Risk Centre of Excellence.
Alexandre Synadino is a consultant with expertise in risk data analytics, climate risk management and regulatory reporting. He is an active member of the Finalyse Climate Risk Centre. His main area of expertise lies in the research, design and development of physical risk assessments using different tools and methods. Alexandre is involved in the conceptualisation of measurement approaches to cover multiple hazard types, geographies and scenarios to respond to regulatory demands for granular and forward-looking analyses.
Due to the unique features of environmental risks, extensive work is underway at the European and international levels to assess the extent to which they require urgent regulatory measures in addition to already existing frameworks. This article provides an overview of the microprudential framework’s most relevant shortcomings and their potential remediations. Its focus is on Pillar 1 aspects, addressing only the risk types most relevant from materiality viewpoint: credit, market and operational risks.
ReadIn recent years, the ECB has launched targeted actions to include climate and environmental risks in its ongoing supervision and has indicated addressing them in its list of priorities for 2022-2024. This article aims to go through the most relevant steps of the 2022 ECB supervisory C&E agenda and leverages on the results of the 2022 ECB climate stress test to provide preliminary commentary regarding banks’ preparedness for the existing and upcoming requirements.
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