26 April 2018: The UN Environment Programme Finance Initiative (UNEP FI) and 16 banks have developed a methodology to help the banking industry understand how climate change and climate action could affect their business, by increasing transparency regarding exposure to climate-related risks, as well as the opportunities to be found in transitioning to a low-carbon economy.

The methodology will help banks implement the recommendations of the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD), which aims to develop consistent, voluntary, climate-related financial risk disclosures for companies to use in providing information to investors, lenders, insurers and other stakeholders.

The methodology is expected to be further strengthened as practices evolve, new and more granular data emerge, and climate assessments and disclosures improve over time.

Efforts to develop the methodology are synthesized in a report titled, ‘Extending Our Horizons: Assessing Credit Risk and Opportunity in a Changing Climate,’ which is the result of a collaboration between UNEP FI and the banks to pilot scenario-based assessments of risks and opportunities associated with the transition to a low-carbon economy, in line with the TCFD recommendations. Risk and investment management experts and climate scientists from the International Institute for Applied Systems Analysis (IIASA), the Potsdam Institute for Climate Impact Research (PIK) and the International Energy Agency (IEA) also contributed to the development of the methodology.

More specifically, the methodology aims to: build on existing risk assessment expertise, procedures and models already being used by banks; enable informed assessments of how risk exposures and potential opportunities might develop in the future; allow institutions to examine risk and opportunities across geographies and sectors; and provide longer-term insights beyond the normal stress-testing two to three year horizon.

Commenting on the report, UNEP Executive Director Erik Solheim said that financial markets can become a catalyst for action on sustainability, noting that the TCFD framework encourages organizations to disclose long-term impacts. The methodology is expected to be further strengthened as practices evolve, new and more granular data emerge, and climate assessments and disclosures improve over time. Its authors acknowledge that work is still needed across sectors and areas of expertise to establish best practices.

The report is the first in a two-part series. The second report, to be released in June 2018, will cover physical risk assessment methodologies. Webinars will be held on 15 May 2018, for those interested in learning more about the new methodology. [UNEP news story] [UNEP FI news story] [Publication: Extending Our Horizons: Assessing Credit Risk and Opportunity in a Changing Climate] [Publication Landing Page]