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Beyond the Horizon 1

Beyond the Horizon

New Tools and Frameworks for transition risk assessments from UNEP FI"s TCFD Banking Program

Acknowledgements

UN Environment Finance Initiative and the program would like to express their gratitude to Oliver Wyman Consulting, the collaborating partner in Phase I of the TCFD Banking Program, who, along with UNEP FI and the participating banks, developed the transition risk methodology referenced in this report. Special acknowledgement is due to Oliver Wyman colleagues John Colas, Ilya Khaykin, and Alban Pyanet, who generously supported this current pilot with their expertise and guidance on climate risk.

Authors

UNEP FI

Project Management

Beyond the Horizon 3

Disclaimer

Copyright

Contents

1. Introduction ........................................................................ .................1 2. Expanding to new sectors ......................................................................4 3.

A user-friendly tool ...............................................................................8

4. A Group transition risk heatmap ............................................................11 5.

Conclusion

.................27 6. References ........................................................................ .................28

Beyond the Horizon 1

1.

Introduction

1.1.

The Phase I TCFD program

Figure 1: Transition risk methodology from Phase I of the UNEP FI TCFD Banking Program

Borrower-level calibration

Portfolio impact assessment

Transition scenarios

Risk factor

pathways + sensitivities

Scenario

description

Transition scenarios

Portfolio impact assessment

Borrower-level calibration

2 Beyond the Horizon

1.2.

The evolving climate risk space

Figure 2: GARP survey- Introduction of climate risk

Percent of Firms

Beyond the Horizon 3

1.3.

Phase II: Expanding the toolkit

Figure 3: Pillars of Phase II of the UNEP FI TCFD Banking Program

Climate Scenarios

Data and methodology

Reporting and governance

4 Beyond the Horizon

2.

Expanding to new sectors

Figure 4: Phase II working groups

Metals & MiningOil & Gas

Utilities

Real Estate

Sectors

Agriculture &

Land Use

Industrials & Transportation

Beyond the Horizon 5

the variable combinations that comprise the risk factor pathways for their sectors and used them in the calibration process.

Change in adjusted net

Changes in revenue

Incremental low-carbon capital expenditure

Incremental emissions costs

Change in the carbon price

times scope 1 emissions relative to baseline

Change in the cost of energy

and non-energy production inputs relative to baseline Additional capital expenditure borne by the sector to transition to a low carbon economy Incremental price times demand in the transition scenario relative to baseline

New risk pathwaysCombined risk factor pathways

In order to fully assess the risk factor pathways for their given sector, participants needed to understand two things: the impacts of transition risks on borrowers in the sector and the climate ways that transition risks could manifest within their sectors. In addition, they discussed the effects these risks would have on creditworthiness and the extent to which their current rating processes captured transition risks. Banks engaged their credit experts in these conversations along with sector experts within their institutions. To grasp the storylines and key assumptions of the climate scenarios, bank participants spoke at length with the climate modelling teams who created the IAMs. Through sessions with PIK and IIASA modelers, the banks came to appreciate the high-level narratives within each scenario as each variable that went into the risk factor pathways. Each sector working group could examine whether the major transition risks were captured by the existing risk factor pathways. Detail on

6 Beyond the Horizon

Figure 6: Risk factor pathways by sector

CATEGORYSECTOR DIRECT

EMISSIONS COSTINDIRECT

EMISSIONS

COSTLOW-CARBON

CAPITAL

EXPENDITUREREVENUE

Energy

End-use

Agriculture

and forestry

Beyond the Horizon 7

Many of these pathways had previously been validated in Phase I by participants in that earlier program.

Working groups in Phase II found that most risk factor pathway combinations remained appropriate

for capturing the transition risks experienced by their sectors. In a few cases, additional granularity

was desired to enable a more complete view of the impacts of the scenario on certain sub-sectors. For

some sectors, granularity was limited by the variables output by the IAMs. As these models continue

to evolve, new variables may add further useful information regarding sectoral risks. Another potential

source of granularity could come from external sources that are consistent in their assumptions with

the climate scenarios being used. In the future, the risk factor pathways will be periodically reassessed

by UNEP FI"s TCFD program as new data from IAMs and other sources becomes available.

Phase II saw the application of risk factor pathways for assessing transition risk across a wider range

of economic sectors. However, there are still areas of sectoral enhancement that future programs mentioned above, there is a desire to explore more granular sectoral assumptions and variables that and analysis. At present, portfolios can be assessed for a given sector and geography. The resulting

tion, the combination of transition and physical risk losses could be integrated for a given temperature

stakeholders are increasingly indicating the desire to assess portfolio performance across a wide vari

be of value.

8 Beyond the Horizon

3.

A user-friendly tool

Figure 7: Transition Check webtool homepage

Beyond the Horizon 9

Figure 8: Transition Check webtool scenario narrator

Figure 9: Transition Check webtool report creator

10 Beyond the Horizon

Figure 10: Transition Check webtool output viewer

Beyond the Horizon 11

4.

A Group transition risk heatmap

4.1.

Designing the Heatmap

1.quotesdbs_dbs2.pdfusesText_3

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