Banks use scenario analysis to evaluate the impact of climate change on risk exposures and product portfolios, but overall adoption is low. However, with regulators putting a bigger emphasis on ESG risks, banks are well advised to prepare and build new capabilities to steer their business.
Goals and Objectives
Prepare for potential adverse scenarios (e.g., impact on all portfolios, given a global temperature increase of <2C, 2C and >2C) and future stress tests.
Assess firmwide vulnerability to climate change and natural disasters.
Identify potential exposures to adverse scenarios, and proactively limit those exposures.
Disclose results, and integrate them into the corporate strategy and decision making.
Data analytics (e.g., scenario modeling, and predictive modeling), model risk management, environmental data, and IoT
Use Case Summary
Measuring sustainability risks is a major source of uncertainty, given the impossibility to predict new policies, court decisions, regulatory directives, and consumer response as well as a lack of reliable, consistent data. Scenario modeling is helping to anticipate changes in the operating environment and develop strategic and tactical responses proactively.