NEW REPORT AVAILABLE!

Report of the C-ESG Risk Roundtable Climate Scenario Workstream

BRUSSELS, 28 May 2024 – This report is the result of the collaborative work of the Climate Scenario Analysis WorkStream (CSA WS) members, facilitated by BNP Paribas in its role as chair of the CSA WS and with the participation of the ECB and the EBF in an observing capacity. The CSA WS objective is to share, amongst participating banks, the current practices and targeted evolutions on Climate and ESG scenario analysis, internal capital assessment and risk materiality analysis. The initial focus is on Climate and Environmental risk factors. Over 2024, the scope of CSA work will be extended to Biodiversity risk factors and other Environmental concerns.

The understanding of common building blocks as well as discrepancies, including structural differences (due, among other things, to gaps in risk profiles or corporate values), identification of clear challenges with proposed short-term solutions, public dissemination of observed practices and learnings are amongst the key objectives of the CSA WS.

Climate scenario analysis is on the rise.

Recent scientific studies confirm that, without strong action to reduce climate risk, the increase in the frequency and severity of climate events will lead to losses for the economy as a whole and therefore for the financial sector. Moreover, a disorderly or misaligned transition between economic blocs would in particular create shocks to businesses, individuals and, consequently, the financial sector, both as a result of increased credit losses, as well as market shocks and an increase in legal disputes.

Financial supervisory authorities are concerned about both the impact on the safety and soundness of financial institutions as well as the systemic consequences of no or erratic transition. Moreover, the expectations of financial markets and of the various stakeholders are strong in terms of quantifying the financial consequences of the various possible alternatives to date. European supervisors have announced ambitious action plans and are starting to act upon the first steps meticulously.

Financial institutions, such as banks, insurance companies and asset managers, are under pressure, both internally and by their external stakeholders, to communicate on the impact of climate risk factors and to integrate this analysis into the corporate strategy and risk management. This is particularly relevant in Europe, given the relatively consensual alignment of political views on climate goals and the high banking intermediation level (80% of the economy still goes through bank balance sheets).

In a context of extreme uncertainty and significant legal risk, the CSA WS shares a view that the analysis of climate scenarios is a relevant tool for climate risk mitigation as it enables banks to manage risk based on concrete scenarios. Making strategic choices conditional to a given scenario reduce the risk of making unmanageable commitments. While under no obligation to report, disclosing impact analyses based on a set of anchor climate scenarios, financial institutions can limit their responsibility to managing transmission channels towards financial risks to which they are materially exposed.

Replays from the launch event can be found here