Climate risk management: integration into credit risk management

What it is about

How to strengthen decision-making, financial resilience and corporate sustainability in the face of increasingly uncertain climate scenarios by integrating climate risks into credit risk management.

Session summary

The speaker opens with a basic question, whether climate risk is a matter of activism or of risk management, and answers it with physical evidence: rising emissions and carbon dioxide concentration, higher temperature, sea level and extreme events, and five trajectory scenarios that depend on the energy transition. He translates that picture into financial terms: a damaged property or harvest lowers the value of collateral, reduces repayment capacity and raises provisions and required capital. He distinguishes physical risks, acute and chronic, from transition risks, which include regulatory, technological, consumer and reputational changes.

He explains why many organizations manage it poorly: they treat it as a reporting matter, with fragmented units, no methodologies to measure its marginal effect on the portfolio, weak governance and misaligned incentives. He argues that disclosure should be the result of management, not its starting point, and that the financial system is an engine of the transition through financing. To measure physical risk he proposes crossing each area’s climate hazard with the location of clients and their vulnerability, and for transition risk, working with sector scenarios that are already published. The questions covered climate stress tests, the destination of the loan as a key data point, rising insurance costs and stranded assets, regulatory incentives and whether to manage by portfolio or client by client.

Topics covered

• Physical evidence of climate change and trajectory scenarios
• From climate to the balance sheet: collateral, provisions and capital
• Physical risks (acute and chronic) and transition risks
• Common mistakes: reporting without managing, fragmentation and weak governance
• How to measure: hazard, exposure and vulnerability of clients
• The financial system as an engine of the transition and disclosure as a result
• Questions: stress tests, insurance, stranded assets and portfolio approach