2024-06-05-KPMG-Measuring_climate-related_financial_risks_using_scenario_analysis_3页_838kb

Bank of England's Guidance on Measuring Climate-Related Financial Risks

Introduction

The Bank of England's June 2024 views, as part of its April 2024 Quarterly Bulletin, emphasize the use of scenario analysis for measuring climate-related financial risks. Backward-looking metrics, such as carbon intensity and financed emissions, have limitations in capturing issuer-specific actions and transition risks, making scenario analysis essential for decision-useful information in risk management.

Key Recommendations

• Scenario analysis models the impact of top-down climate scenarios on financial asset values, addressing the unprecedented nature and uncertainty of climate risks.
• The Bank advises extending macro scenarios to asset levels to incorporate factors like physical risks (e.g., flood frequency), transition risks (e.g., regulatory costs), and related variables (e.g., sovereign debt ratios) for sovereign, corporate, and residential asset classes.
• Regulatory focus includes BCBS's call for banks to improve climate risk quantification and IAIS's consultation on climate risk scenario analysis. Institutions must refresh climate modeling expectations under regulators like the PRA and ECB.

Asset-Level Analysis Considerations

• Corporate Bonds: Transmission variables include regional carbon prices, GDP, and energy consumption data for assessing issuer-specific impacts.
• Sovereign Bonds: Bond yields are influenced by expected decarbonization plans; macro projections must be extrapolated for longer maturities due to climate-related risks affecting inflation and government finances.
• Residential Mortgages: Challenges include estimating changes in risk-free and credit risk components of interest rates; physical risks require property-level data from catastrophe models.

Broader Context and Regulatory Landscape

Climate risk quantification is a growing priority for financial services regulators. Scenario analysis must address temporal misalignments, intra-sectoral variabilities, and economy-wide interdependencies to provide granular insights. Standard risk models lack the flexibility to handle climate uncertainties, necessitating updated frameworks and tools.

KPMG Services

KPMG offers expertise in climate risk modeling, scenario analysis, and integration into financial strategies. Their services support benchmarking, data sourcing, model validation, and disclosure to help institutions meet regulatory requirements and mitigate climate risks.