Integrating Climate in Credit Risk Modelling

Conceptual foundations for climate risk-driven credit risk modelling

• Climate-related and environmental risk impacts

• Climate risk drivers and their transmission into traditional risk categories

• with a particular focus on credit risk

Transmission channels:

• Microeconomic transmission channels

• Macroeconomic transmission channel

Risk amplifiers:

• Risk driver interactions

• Financial amplifiers

• Transmission through multiple channels

Risk mitigants:

• Proactive (pre-emptive) risk mitigants

• Reactive risk mitigants

Case studies

Climate in Credit Risk Modelling Course Exercise: Group activities in break-out rooms

Climate risk and its impact on credit risk

• Introduction to measuring climate-related financial risks

• Focus on bank-level methodologies as a subtype of measurement approaches

• Select aspects that are crucial in climate-related financial risk measurement: Exposure granularity trade-offs, top-down and bottom-up approaches

• Incorporating mitigation effects

• Heterogeneities and sources of uncertainty

• Climate-related data unique characteristics

• Multiple types of data (different layers in the assessment)

• Need for current & historical data

Bank-level mapping approaches, ratings, and scores

Forward-looking methodologies:

• Integrated Assessment Models (IAMs)

• Agent-Based Models (ABMs)

Scenario analysis based on forward-looking data (projections):

• Stress tests

• Sensitivity analyses

Climate scenario analysis course deep-dive:

• NGFS (Network for Greening the Financial System) scenarios

• IEA (International Energy Agency) scenarios

Time horizon and balance sheet assumptions

Portfolio assessment and assessment of sectoral exposures:

• For transition risk

• For physical climate risk

Case studies

Debriefing on recent regulatory climate stress tests

Group exercises in break-out rooms

Recap

• Conceptual foundations for climate risk-driven credit risk modelling Risk impacts, risk drivers, and transmission channels

• Risk amplifiers and risk mitigants

Climate risk and its impact on credit risk

• Top-down and bottom-up approaches, uncertainty, etc.

• Multiple types of data (different layers in the assessment)

• Scenario analysis and climate scenarios (NGFS and IEA

• Portfolio assessment and assessment of sectoral exposures

Group exercises in break-out rooms

Integration of climate risk in credit risk modelling

• Integrating climate risk across the credit risk lifecycle: Client analysis and credit rating

• Collateral (re)valuation

• Loan pricing and FTP

• Exposure/risk monitoring

• Case studies

Overview of best practices identified by the Basel Committee on Banking Supervision (BCBS):

• Transition risk-focused assessments

• Physical risk modelling and physical risk-focused assessments

• Case studies

Overview of best practices identified by the European Central Bank (ECB):

• Identification of exposures and materiality assessment

• Setting strategic targets and risk appetite: Science-Based Target Initiative (SBTI)

• Paris Agreement Capital Transition Assessment (PACTA)

• Partnership for Carbon Accounting Financials (PCAF)

• Consideration in Variable Remuneration

Risk management tools:

• Scorecards and rating systems

• Loan pricing

• Collateral valuation

• Capital adequacy assessment

Transition finance product offering

Case studies

Summary and putting the pieces together

Group exercises in break-out rooms

Training Objectives

This Climate Risk Modelling course will equip you with the following:

• A thorough understanding of the conceptual foundations of climate modelling and climate-driven credit risk modelling.

• How to apply materiality assessment at a company level and portfolio level for the impacts on the credit of physical and transition climate risks.

• Master how physical and transition risks transmit into credit risk metrics such as PD, LGD, and EAD.

• Complying with current regulatory requirements and/or recommendations.

• How to integrate climate factors into credit risk modelling for PD and LGD.

• Integrating climate risk management tilts into the credit risk scorecard model.

Training Course Summary

The jury is still out on whether climate-related risks are already incorporated into credit pricing and other financial indicators, their models, and to what extent.

The reality is that the physical impacts of climate change and the need to adapt to increasing climate-related regulation are currently having impacts on business models, revenue, costs, and other business factors. This applies both to financial institutions and real economy businesses.

To date, little advancement has been made in “climate risk modelling” by financial institutions, and financial supervisors are applying pressure to change that.

Redcliffe’s Climate in Credit Risk Modelling training course will show you how to distinguish between the underlying concepts of climate-change-driven credit risks and navigate the limitations of currently available practices, such as data availability. You will learn to identify the risk transmission channels that lead from climate change to the financial impact on corporations.

Finally, the course takes participants through the steps to practically integrate these risks into existing credit risk scoring models.