Bankers and scientists working together on climate scenarios

A UN Environment project brings together experts to help banks stress test for climate change.

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Banks around the world are working on ways to understand how climate change will affect their customers and their businesses, but until recently climate scientists and bankers have not been working side by side.

That’s changed with a UN Environment Programme Finance Initiative (UNEP FI) project that has brought together science and finance experts to integrate science into bank stress testing and risk management.

NAB is one of 16 leading international banks that have been working together to pilot the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD) set up by the Financial Stability Board. The task force was set up to guide investors on how to assess climate risk.

The banks are developing methodologies to integrate climate scenarios into the stress testing of their own loan portfolios. The aim is to improve disclosure of risks and identify opportunities to help finance the transition to a low-carbon economy.

A longer time horizon

Part of the challenge is that banks have traditionally used a three to five-year time frame when they stress test for various macroeconomic scenarios.

But stress testing for climate change requires analysis over a much longer time horizon – the time frames for climate modelling being used by the bank go out to 2040.  Looking so far into the future is both exciting and intellectually challenging.

The UNEP FI Global Steering Committee, of which I am a member, oversees the Initiative’s work with banks, investors and insurance companies on various projects to promote sustainable development.

The TCFD pilot project brought together banks and scientists working on climate data models to test the impacts of climate risk under three scenarios: a global average temperature increase of 1.5 degrees Celsius, 2 degrees (in line with the Paris Accord), or 4 degrees which represents business as usual by the end of the century.

Opportunities for financing

We’re aiming to combine climate change data with financial risk management to better understand the risks to our customers and NAB’s own loan portfolio.  We believe there are significant opportunities as well, such as funding renewable energy generation or resilient infrastructure that is better able to withstand climate change.

The 16 banks in the UNEP FI pilot group have been brainstorming and working collaboratively to learn from each other, with the ultimate goal of standardising an approach to assessing climate risk in lending portfolios.

The pilot group has developed guidance to help banks apply state-of-the-art climate change scenarios to assess exposure in their corporate loan portfolios.

Banks will be key in financing the transition to a low carbon economy, and NAB has been working in this area for more than 15 years – we recently financed our 100th green loan for renewable energy.

By partnering with the UNEP FI, peer banks, and other organisations, NAB aims to make a serious contribution to tackling the challenges of moving to a low-carbon world. We see real benefits from this work for our customers, regulators, and the community who are considering strategies and responses to climate change.

Find out more about the guidance to help the banking industry adopt TCFD recommendations