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 which 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

Redcliffe’s Climate in Credit Risk Modelling training course is delivered by a trainer with over 15 years of experience in the banking sector.

She has worked across credit risk and risk analysis, including climate scenario analysis and stress testing for banks such as KBC, OTP and Raiffeisen Bank. At KBC, she was a senior risk manager, leading in developing and implementing credit risk management toolkits that measure and monitor ESG/climate risks and opportunities, reporting those to the Executive Committee.

Notably, she performed transition and physical climate risk materiality assessments based on scenario narratives and implemented PACTA methodology for the loan portfolio, where she contributed directly to the European Central Bank’s climate stress test by the firm.

More recently, she delivered consultancy as the Principal Consultant on ESG and credit risk; she also established climate and environmental risk management services for a consultancy firm.

She holds an MSc in Finance and Actuarial Sciences, a PhD, and a specialisation in Corporate Finance from the Corvinus Management and Business Administration Doctoral School in Budapest. She is also a certified financial analyst and certified risk manager (CFA – Chartered Financial Analyst, FRM – Financial Risk Manager, PRM – Professional Risk Manager), and has obtained the GARP Sustainability and Climate Risk (SCR) Certificate.

• 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.

• A major focus of this climate risk modelling course you will immediately benefit from is the quantitative approaches to the financial materiality that ESG risks can have for credit risk.
• Expert insight into practical aspects of adapting financial risk modelling.
• A thorough review of related academic research and its implications.
• Expert guidance and perspective based on international experience in ESG.

• Credit Analysts
• Risk Officers
• Treasury professionals of corporates who want to enhance their working knowledge

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.