A chilly reception for
climate risk capital
Bankers don’t believe climate-adjusted
risk weights will enter EU prudential
framework – not for now, at least
The financial impact of transition risk was brought home rather alarmingly earlier this year when Rabobank announced that its entire exposure to the Dutch dairy industry was at higher risk of default following Dutch government plans in June to cut nitrogen emissions from livestock farming. Fearing the rules could threaten the financial viability of many operations in the sector, Rabobank classified its €10.3 billion ($10.7 billion) exposure to Dutch agriculture under stage two of the International Financial Reporting Standard 9 loan-loss framework, denoting a heightened risk of default. While Rabobank has an unusually large exposure to agriculture compared to other European banks, this is nevertheless an early and important example of transition risk in practice.
Moreover, as countries enact more climate legislation, such examples are likely to occur in other geographies and sectors. Loans to the agricultural sector make up only around 4% of total loan portfolios at European Union banks according to EU data, but loans to the high-transition risk sector in aggregate – including such industries as real estate, manufacturing and energy – make up almost 63% of total loans and advances.
Banks will now want to keep a very close eye on the creditworthiness of firms within the high-transition risk sector. As more ambitious climate policies are announced globally, credit deterioration within certain sectors is an ever-growing risk.
Modelling and managing this nascent risk is still fraught with difficulties. However, increasing rules around stress-testing and disclosure are helping to increase expertise and bring much-needed transparency to the endeavour.
This Risk.net Environmental, social and governance (ESG) and climate risk special report brings together a collection of articles that explore the latest issues in assessing and managing ESG and climate risk. The tide is turning, with many more firms now treating ESG and climate risk as another financial risk and not just a reputational risk.
There is a greater sense of urgency around measuring this risk and indeed taking actions that will facilitate the transition. Making the necessary changes now rather than later is critical not only to achieving the end-goals, but to avoiding some of
the biggest shocks that will occur if action is delayed, according to many lenders
and investors.
The European Central Bank, for example, estimates the probability of default for the average eurozone bank’s corporate loan book could be 7.1% higher by mid-century if governments don’t act quickly to mitigate climate change.
ESG and climate risk
special report 2022
Carbon markets
What to watch
As carbon markets take on increased importance, Victoria White, senior associate at Allen & Overy, discusses the outlook for carbon trading, highlighting the key developments shaping these markets
Sponsored feature
Risk
capital
Impact investing
Trends and best practices
Q&A
For enquires and information regarding Risk.net special reports, contact:
Antony Chambers
Publisher
+44 20 7316 9683
antony.chambers@infopro-digital.com
special report 2022
ESG and
climate risk
Uncertainty on how governments plan to
curb emissions adds political dimension to
credit quality assessments
Net-zero pledges bring
big unknown for credit risk
Credit
risk
Lenders ask standards boards for guidance
on how rules should be applied
‘Are we nearly there yet?’
Banks navigate ESG loan accounting
ESG loan accounting
Dispersion of estimates for corporate impairments highlights variety of assumptions for modelling climate risk
Banks’ loan-loss forecasts diverge
in BoE climate exercise
Stress
tests
Cost of limiting global warming to 1.5° Celsius will become too great for economy within 36 months
LGIM’s climate modelling shows ‘point of no return’ in 2025
Modelling
Banks risk becoming a “whipping dog” in the fight against climate change, says departing risk chief
Ex-Deutsche CRO: banks face hundreds of billions in climate fines
Penalties
and fines
Banks back the increased use of global warming criteria when calculating XVAs
Climate is changing for derivative valuation adjustments
XVAs
Europe’s emissions trading system could be a catalyst for the energy transition, but only if
prices rise
Carbon fund increases returns by decreasing supply of permits
Carbon
trading
Netting shorts on big polluters distracts
investors from the task of persuading firms
to slow climate change
LGIM blasts ‘dangerous’ netting of short positions on carbon emitters
Short-selling carbon
Sponsored
feature
A panel of investment specialists discusses the rapidly expanding world of ESG investing, with a particular focus on climate. They discuss best practice for achieving impact investing, their expectations on climate risk disclosure and the latest advances in data and analytics to be applied when assessing climate and ESG risk
Impact investing
Trends and best practices
Q&A
Bankers don’t believe climate-adjusted
risk weights will enter EU prudential
framework – not for now, at least
A chilly reception for
climate risk capital
Risk
capital
Lenders ask standards boards for guidance
on how rules should be applied
‘Are we nearly there yet?’
Banks navigate ESG loan accounting
ESG loan accounting
Uncertainty on how governments plan to
curb emissions adds political dimension to
credit quality assessments
Net-zero pledges bring
big unknown for credit risk
Credit
risk
Cost of limiting global warming to 1.5° Celsius will become too great for economy within 36 months
LGIM’s climate modelling shows ‘point of no return’ in 2025
Modelling
Banks risk becoming a “whipping dog” in the fight against climate change, says departing risk chief
Ex-Deutsche CRO: banks face hundreds of billions in climate fines
Penalties
and fines
Netting shorts on big polluters distracts
investors from the task of persuading firms
to slow climate change
LGIM blasts ‘dangerous’ netting of short positions on carbon emitters
Short-selling carbon
Dispersion of estimates for corporate impairments highlights variety of assumptions for modelling climate risk
Banks’ loan-loss forecasts diverge
in BoE climate exercise
Stress
tests
Europe’s emissions trading system could be
a catalyst for the energy transition, but only if
prices rise
Carbon fund increases returns by decreasing supply of permits
Carbon
trading
A panel of investment specialists discusses the rapidly expanding world of ESG investing, with a particular focus on climate. They discuss best practice for achieving impact investing, their expectations on climate risk disclosure and the latest advances in data and analytics to be applied when assessing climate and ESG risk
Impact investing
Trends and best practices
Net-zero pledges bring big unknown for credit risk
Credit
risk
Ex-Deutsche CRO: banks face hundreds of billions in
climate fines
Penalties and fines
‘Are we nearly
there yet?’
Banks navigate
ESG loan accounting
ESG loan accounting
Banks’ loan-loss forecasts diverge
in BoE climate exercise
Stress tests
LGIM’s climate modelling shows ‘point of no return’ in 2025
Modelling
Climate is changing for derivatives valuation adjustments
XVAs
Carbon fund increases returns
by decreasing supply of permits
Carbon trading
LGIM blasts ‘dangerous’ netting of short positions on carbon emitters
Short-selling carbon
For enquires and information regarding Risk.net special reports, contact:
Antony Chambers
Publisher
+44 20 7316 9683
antony.chambers@infopro-digital.com
Banks back the increased use of global warming criteria when calculating XVAs
Climate is changing for derivatives valuation adjustments
XVAs
special report 2022
