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:
- 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.
- 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.
- 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.
- 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.