Climate Risk Tools

David Carlin

Head of Climate Risk

In the previous video David Carlin explored some processes behind transition and physical risk assessments. In the final video of his series , David Carlin explores how financial institutions are using climate risk tools for risk assessment, strategy setting, client engagement, regulatory requirements and assessing opportunities.

Climate & Biodiversity

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Climate Risk Tools

4 mins 50 secs

Key learning objectives:

Outline the 5 main use cases of climate risk tools for financial institutions
Understand how financial institutions can pick the right climate risk assessment tools

Overview:

As we move towards a net zero world, there are growing expectations of financial insitutons to make the right decisions regarding climate risk assessment. Hence, they first need to ensure that they choose the right tools to help them with this. They need to consider their main use cases and then select the one most appropriate for their needs depending on the level of analysis they require.

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Summary

What are the 5 main use cases for financial institutions regarding climate risk tools?

1. Climate risk assessment - The type of analysis can be done at different levels such as portfolio or asset-levels. This requires site-specific analytics using geospatial mapping. It can aso be at an overall counterparty-level, requiring sectoral and sub-sectoral data on activities.

2. Strategy-setting - Based on the insights from climate risk assessments, financial institutions can develop effective transition, resilience, and operation strategies to help sustain long-term success.

3. Client engagement - Institutions can use analysis in order to perform other analysis to assess cash flows and credit risks associated with their clients.

4. Regulatory & stakeholder requirements - More and more jurisdictions are introducing regulations around climate-related disclosures and risks and policymakers increasingly moving towards net-zero policies, having the right tools that can assess transition readiness and transparency is key.

5. Assessment of opportunities - This shift to net zero will be a source of major opportunity for financial institutions. There is an opportunity for institutions to use these tools to identify potential areas of growth and new businesses for them to explore.

How can financial institutions pick the right tools for climate risk assessment?

Financial institutions as a starting point can look at ‘what is wanted’ or ‘what is needed’. Then decide on the level of analysis by asset class, coverage required and the scenarios required. They can also evaluate tools based on validity and validation, usability, the depth of analysis produced and transferability of results to areas such as portfolio-monitoring and business strategy setting.

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David Carlin

David Carlin is an acknowledged authority on climate change and its implications for the financial system. He is the founder of D. A. Carlin and Company, an advisor to governments, corporates, and financial institutions on climate and ESG topics. He has authored numerous reports that provide practical tools for financial actors looking to address climate change and has run capacity-building programs for financial institutions and supervisors around the world. David led the creation of UN Environment Programme’s- Finance Initiative (UNEP FI)’s Risk Centre as the head of Risk. Over the past years, he has worked with over 100 global banks, investors, and insurers on climate scenarios, climate risk assessments, and climate governance. He has been an advisor to UNEP FI’s TNFD pilot program on nature and biodiversity related risks, the Net-Zero Banking Alliance (NZBA), and the Glasgow Financial Alliances for Net Zero (GFANZ). David is also a contributor to Forbes and a senior associate at Cambridge’s Institute for Sustainability Leadership (CISL) as well as a visiting fellow at King’s College London. David has worked as a Principal in Finance, Risk, and Public Policy for Oliver Wyman and in Model Risk Management for PNC Bank. His background is in quantitative modeling and decision science.

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