Our latest Climate article for GARP is published

1 February 2024

Our latest GARP Climate article - Based on our long-term experience building and implementing credit models E2E, here are four ideas for bank’s Climate Risk Stress Testing agenda for 2024 and beyond:

  1. Climate Sensitive Credit Models: since direct climate impacts on credit risk have not yet been clearly observed to-date, bank’s climate sensitive wholesale PD credit model deliverables need to be implemented mostly as adaptations of existing credit models. This suggests, implementing these models will follow a somewhat different process then current IRB models.
  2. Designing Climate Scenarios as Objects: in contrast to a few deterministic scenarios (see, Stress Testing and IFRS9) the growing proliferation of climate scenarios with many dimensions suggests designing ‘scenarios as objects’ can help streamline the implementation process.
  3. Alternative Industry Sector Climate (‘Brown/Green’) Segmentation: segmenting industry sectors into standardised ‘buckets’ are used throughout banks’ risk management and reporting – new requirements for ‘brown/green’ climate characteristics could have a key impact on how bank’s segment industry sectors.
  4. Increased Use of Climate Scenarios (‘Narratives’) Instead of Models Will Not Be Easy: for climate risk, switching from a model-centric to more ‘’narratives-based’ process has some key impacts banks will need to start considering in 2024.
Read the full article on GARP >>