Methodologies to assess physical risk and opportunities of climate change
Sixteen leading banks, among which Rabobank, convened by the UN Environment Finance Initiative (UNEP FI) and supported by climate risk advisory firm Acclimatise, have released new methodologies that aim to help the banking industry to understand and manage the physical risks and opportunities of climate change in their loan portfolios.
- The ground-breaking methodologies, published in the report Navigating a new climate, support the implementation of the recommendations of the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD).
- Using the methodologies banks can begin to assess physical climate risks on key credit risk metrics for climate-sensitive industry sectors.
- The guidance also sets out how banks can start to evaluate opportunities to support their clients in becoming more climate-resilient.
- The methodologies, which were piloted for agriculture, energy and real estate portfolios, can be used by banks to assess a wide range of sectors in their loan portfolios.
- These new methodologies are now available for public download from: www.unepfi.org/tcfd-physical
- A complementary methodology focused on the assessment of transition risks and opportunities, was published in April.
According to the UN Environment Finance Initiative (UNEP FI) press release:
The methodologies are designed to enable banks to be more transparent about their exposure to climate-related risks and opportunities, in line with the recommendations of the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD).
The banks leading this work and currently piloting the methodologies are ANZ, Barclays, BBVA, BNP Paribas, Bradesco, Citi, DNB, Itaú Unibanco, National Australia Bank, Rabobank, Royal Bank of Canada, Santander, Société Générale, Standard Chartered, TD Bank Group and UBS.
Using the methodologies, banks can begin to assess physical climate risks in their loan portfolios, evaluating the impacts on key credit risk metrics - Probability of Default (PD) and Loan-to-Value (LTV) ratios. The forward-looking assessments offer longer-term insights that go beyond the usual stress-testing horizon of 2-3 years.
Case studies from leading banks who piloted the methodologies are provided in the report. Rabobank focused the analysis of this pilot on the retail real estate sector’s susceptibility to flood risk in the Netherlands.
Read here the full UN Environment FI press release.
Bas Rüter, Director of Sustainability, Rabobank: “Rabobank’s participation in the UNEP FI pilot on the implementation of the recommendation of the TCFD is in line with our mission of Growing a Better World Together. The partnership with leading international organizations like UN Environment helps us in our drive to make a serious contribution to tackling the challenges brought about by climate change. The knowledge developed within the UNEP FI TCFD working group is an important stepping stone that can help us realize our commitment to the Paris Agreement targets.”