Climate Risk assessment is becoming a central topic and Stress-testing is seen as the key tool for financial institutions to assess climate-related risks financial impacts…
CONTEXT – Climate Risks
The stakes around climate change are huge and banks are expected to play a key role in financing the transition to a low-carbon economy. The changing climate and the transitioning to a more sustainable economy induce significant risks for financial institutions as pointed out by the ECB in its SSM (Single Supervisory Mechanism) Risk map.
Consequently, the assessment and management of climate risks is becoming a central topic for central banks, regulators, and financial firms.
The ECB has thus issued its “guide on climate related and environment risks” in November last year with the aim that financial institutions comply with the expectations set out in the guide by mid-2022. The EBA has been mandated to assess how ESG risks can be incorporated into the three pillars of prudential supervision and published subsequently discussion papers on “management and supervision of ESG risks for credit institutions and investment firms” (November 2020) and on “Pillar 3 disclosures of ESG risks” (March 2021).
Moreover, the Basel committee has released two reports on tranmission channels of climate risks to the banking system and the measurement of climate-related financial risks.
Given climate risks specific features and its long term forward-looking nature, Stress-Testing is seen as the key tool to assess their financial impacts.
Several supervisors are besides conducting or planning to conduct bottom-up stress-tests involving financial institutions: ACPR’s climate stress-testing exercise second part of last year, Bank of England’s exercise from June this year, EBA/BCE’s exercise planned for next year …
Moreover, as stated in its guide, the ECB is expecting that institutions with material climate-related risks will incorporate these in their ICAAP and so analyse their impacts as part of internal stress-testing.
It is becoming essential for financial institutions to improve their capabilities to assess and manage climate-related risks and invest on the design and execution of climate risks stress-testing… Read more on the design and execution of Climate Risk Stress-testing in this article!
CAPTEO_Climate-related Risks_Juin 2021
PUBLICATION CONTACT
Michael RIGOTARD
Director Risk & Finance
+33 (0)7 52 67 19 58
Michael has eighteen years of international experience in Risk management. Throughout his carrier, he has developed a strong expertise across risk disciplines (market, counterparty, credit …). He has an extensive experience managing quantitative risk teams, leading risk and capital projects (IMM, IMA, IRBF, AMA, FRTB CVA …) and driving the implementation of risk management and stress- testing frameworks across the risk range.
He joined CAPTEO in 2018 as a Director to develop the advisory risk management and the stress testing and Capital optimisation offers. He is assisting financial institutions on risk and capital management topics and projects. He has notably framed and directed the FRTB CVA project of a large French investment bank and this last year he was responsible of the steering and oversight of internal and regulatory stress-testing (STEBA, ICAAP, Covid 19, climate stress-testing) across risk disciplines of a large French investment bank.
If you want to find out more about Climate Risk Stress-Testing, or if you’re in a search of job opportunities in this sector, do not hesitate to contact us!