IIF compares and models approaches to climate risk
The Institute of International Finance (IIF) has recently published an interesting report, titled ‘Navigating Climate Headwinds: Reference Approaches for Scenario-based Climate Risk Measurement by Banks and Supervisors.’ It takes stock of emerging public sector and banking industry practices on the topic of Scenario-based Climate Risk Measurement (SCRM).
Noting the numerous design choices that must be made when developing an SCRM exercise, it also offers three ‘reference approaches’ as blueprints to help align these choices with different microprudential, macroprudential, and strategic objectives and applications. These reference approaches, from longest to shortest term, include ‘Horizon Scanning’ to size up future risks; ‘Firm-level Assessment’ to explore the dynamics of transition; and ‘Stressing Climate Risk Drivers’, essentially conventional stress testing, to test for vulnerabilities.
IIF stresses the importance of greater global coordination and the risk of regulatory fragmentation if divergent approaches are taken, and makes a number of suggestions about how to move forward. “Cross-jurisdictional alignment of SCRM exercises should be a near-term priority for prudential authorities, aided by the global standard setting bodies,” it states. “[This] would deliver a triple-win: it would bring greater consistency to the results of exercises; support the development of common approaches to key modelling and data elements; and drive greater prioritization of investments in technical capacity by participating financial institutions.”
Read more here.