GARP Sustainability & Climate article
26 October 2023
Today GARP has published our Sustainability & Climate article we contributed (indirectly in honour of the late John Candy): ‘ Climate Trends, Narratives, Shocks and Climate Stress Scenarios’.
There is a lot of ‘BUZZ’ surrounding climate change currently, with much of the narrow macro-prudential focus on climate stress testing.
Here are some key points related to this topic, outlined in our GARP article:
- Mainstream climate risk scenarios focus on top-down, deterministic, economic scenarios – i.e. Trends
- Empirical links between climate and economic risks (volatility) have not to-date been clearly observed – therefore Climate Narratives need to play a key role in climate scenario development
- Credit Cycles in the form of ‘unexpected shocks’ have been clearly observed on an empirical basis over the last 30-40- years – therefore climate scenarios need to include Credit Shocks.
Climate Stress Scenarios – unless you believe ‘Credit Cycles have been Outlawed’ – climate stress scenarios focused on future credit risk impacts should be developed on an integrated basis with solid, empirical credit models reflecting systematic credit risk volatility.