Leading Financial Institutions to Test Lending Portfolios for Environmental Risk
Citi, UBS, ICBC, Banamex, Banorte, Caixa Econômica Federal, Itaú Santander and FIRA are working with the Natural Capital Declaration and the German Government’s Emerging Markets Dialogue on Green Finance to include the economic impact of drought in bank stress testing scenarios
Press Release: Frankfurt, Geneva, Oxford, 3 May 2016 – The Natural Capital Declaration (a global finance-led initiative co-convened by UNEP Finance Initiative and the Global Canopy Programme) and the German Government’s Emerging Markets Dialogue on Green Finance, implemented by GIZ, have launched a joint project with several leading financial institutions to pilot scenario modelling to stress-test corporate lending portfolios for environmental risk. In a first step, the pilot project will develop an analytical framework to enable bank stress testing models to include scenarios of the economic resilience of major industries to the risk of extreme droughts. It will develop scenarios for five countries – Brazil, Mexico, China, India and the United States.
This pioneering project, funded by the German Federal Ministry for Economic Cooperation and Development (BMZ), will combine the latest advances in environmental science with leading risk modelling techniques. The project team has appointed RMS, a global catastrophe modeling firm working in collaboration with academics from leading European universities and global research centres, to develop a drought model to enable financial institutions to better understand their exposure to environmental risk.
Nine international financial institutions representing more than US$10 trillion in assets will input into and test the analytical framework to ensure the development of a systematic shared approach for banks to assess their financial exposure to extreme droughts through corporate loans.
China: Industrial and Commercial Bank of China (ICBC) Ltd
Brazil: Caixa Econômica Federal, Itaú, Santander
Mexico: Banorte, Banamex, Trust Funds for Rural Development (FIRA)
United States: Citigroup
The project will be advised by an expert council comprising renowned specialists from rating agencies, such as S&P, relevant global initiatives, such as the UNEP Inquiry into the Design of a Sustainable Financial System and scientific institutions such as Cambridge University.
Jorge Sobehart, Managing Director at Citi Risk Architecture, says: “Calibrating scenario modelling to reflect how external environmental shocks could affect the credit quality of certain industries will be useful for Stress Testing.”
Liselotte Arni, Head Environmental and Social Risk at UBS, says: “While climate change is a global phenomenon its impacts will vary across geographies. This project will explore unchartered territory by accounting for local variations when stress testing the impact of drought scenarios on credit quality indicators in different industries and regions.”
The project aims to inform the broader agenda of environmental stress testing. Both the Financial Stability Board under its current Chairman Mark Carney and the G20 Green Finance Study Group under the current Chinese Presidency have highlighted environmental stress testing as a crucial instrument to ensure a sustainable financial system.
Nick Robins, UNEP Inquiry Co-Director, says, “This multidisciplinary exercise is very timely. Banks are starting to experiment how to evaluate their resilience to climate impacts, and financial regulators are exploring options for ‘stress testing’ the implications of environmental factors such as climate change.”
Yannick Motz , who manages the Emerging Markets Dialogue on Green Finance at GIZ, states, “Developing environmental stress testing will help to ensure the stability of our financial systems and provide the basis for financial institutions to develop portfolio strategies that reflect the challenges of adapting to climate change and environmental degradation, whilst also supporting a transition to sustainable economic development.”
Eric Usher, NCD Co-Director and Officer in Charge of UNEP FI, says, “This project will take a practical step towards building capacity for banks to test their resilience to increasing financial risks from environmental conditions that can be an ‘invisible’ drag on economic growth in the real economy.”
Daniel Stander, Managing Director at RMS said, “This ground-breaking project is further evidence that catastrophe modelling techniques have application far beyond the industry that pioneered them. This project has the potential to protect the GDP@Risk resulting from financial institutions’ exposure to environmental risks. It could equally stimulate corporations around the world to take an increasingly sustainable approach to their business operations.”
For further information or to arrange interviews, please contact:
Natural Capital Declaration
Rachel Mountain, Head of Communications, Global Canopy Programme email@example.com, +44 (0)1865 724 333 +44(0)7446 733 741
Yannick Motz, Advisor, Financial Systems Development, Emerging Markets Dialogue on Green Finance, GIZ
Nick Ravenscroft, Corporate Communications, RMS
Nick.Ravenscroft@rms.com , +44 (0)2074447863 +44 (0)7780225625
Notes to editors
Drought Stress Testing Project Expert Council
Expert Council members will provide technical and strategic input into the development of the analytical framework. The NCD and GIZ are currently establishing the Expert Council. Existing members include:
Beibei Jiang, Green Finance Consultant and Analyst, Central University of Finance and Economics
Butch Bacani, Programme Leader, The UNEP FI Principles for Sustainable Insurance Initiative
Cyrus Lotfipour, Vice President, MSCI ESG Research
Fernanda Gimenes, Brazilian Business Council for Sustainable Development (CEBDS)
Greg Elders, Senior Analyst Environmental, Social Governance, Bloomberg Intelligence
Dr. Johannes Ruf, Senior Lecturer, Department of Mathematics, University College London
Karen Lockridge, Pension Actuary & Sustainability Champion, Mercer
Marwa Hammam, Executive Director, Master of Finance Programme, Judge Business School, University of Cambridge
Dr. Roger Pulwarty, National Oceanic and Atmospheric Administration (NOAA)
Dr. Arnoldo Matus Kramer, Chief Resilience Officer for Mexico City, Ministry of Environment, Mexico
Ricardo Morales Trosino, National Institute on Ecology and Climate Change (INECC)
Marisol Rivera-Planter, National Institute on Ecology and Climate Change (INECC)
Paul Reig, World Resources Institute
Dr. Carlos Muñoz Piña, Director General for Revenue Policy, Ministry of Finance, Mexico
Mike Wilkins, Global Head of Environmental & Climate Risk Research, Standard & Poor’s Rating Services
Professor Minjun Shi, Chinese Academy of Sciences
Nick Robins, Co-Director, UNEP Inquiry
Samantha Sutcliffe, Principal Green Bonds Asia and Middle East, Skandinaviska Enskilda Banken AB (SEB)
Dr Yusuke Kuwayama, Fellow, Resources for the Future
Dr Adrien Nguyen, Mathematician and Economist, Ecole Polytechnique
GIZ – an innovative partner for the global challenges of tomorrow
The wide range of services offered by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH are based on a wealth of regional and technical expertise and on tried and tested management know-how. We are a German federal enterprise and offer workable, sustainable and effective solutions in political, economic and social change processes.
Most of our work is commissioned by the German Federal Ministry for Economic Cooperation and Development (BMZ). However, GIZ also operates on behalf of other German ministries and public and private bodies in Germany and abroad. These include governments of other countries, European Union institutions, such as the European Commission, the United Nations and the World Bank. We are equally committed to helping our clients in the private sector attain their goals.
GIZ operates throughout Germany and in more than 130 countries worldwide. Our registered offices are in Bonn and Eschborn. We have 16,510 staff members around the globe, almost 70% of whom are employed locally as national personnel.
Emerging Markets Dialogue on Green Finance
The goal of the Emerging Markets Dialogue Programme (EMD) on Green Finance is to increase capital flows to green investments and thereby enable the transformation towards sustainable economies. To achieve this aim, the EMD works with public and private actors from Emerging Markets and Europe to overcome barriers and gaps to increasing eco- and climate-friendly investments. For example, the EMD works with financial institutions from G20 Emerging Markets and Europe to integrate environmental indicators into lending and investment decisions, risk management and product development.
GIZ is commissioned to implement the EMD by the German Federal Ministry for Economic Cooperation and Development (BMZ).
About the Natural Capital Declaration
The Natural Capital Declaration (NCD) is a global finance-led initiative to integrate natural capital considerations into financial products and services, and to work towards their inclusion in financial accounting, disclosure and reporting. It is signed by the CEOs of 43 financial institutions, which are actively working with supporting (non-financial) organisations to develop methods to implement the four commitments in the Declaration. This is being done through a steering committee of signatories and supporters and four working groups, supported by a secretariat formed of the UNEP Finance Initiative and the Global Canopy Programme (GCP).
For more information visit www.naturalcapitaldeclaration.org
About UNEP Finance Initiative
The United Nations Environment Programme Finance Initiative (UNEP FI) is a unique partnership between UNEP and a global network of over 200 banks, insurers and investors from 51 countries. UNEP FI aims at creating an enabling environment for financial institutions to embed sustainable development policies into their operations, and its mission is to mainstream the integration of sustainability across the finance sector. It provides a neutral space to convene stakeholders and acts as a platform at the intersection between finance, science and policy. Visit www.unepfi.org
About the Global Canopy Programme
The Global Canopy Programme (GCP) is a tropical forest think-tank and international NGO, working to demonstrate the scientific, political and business case for safeguarding forests as natural capital that underpins water, food, energy, health and climate security for all. www.globalcanopy.org
RMS is the world’s leading catastrophe risk modeling company. RMS models and software help financial institutions and public agencies evaluate and manage catastrophe risks throughout the world, promoting resilient societies and a sustainable global economy. For more information visit www.RMS.com
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