Green Finance

A Natural Capital Declaration — a global initiative led by financial institutions and structured by the UN Environment Program and the Global Canopy Program, together with the Emerging Markets Dialogue on Green Finance — has just launched a project in partnership with several financial institutions of global importance to investigate the impact of their corporate loan portfolios on environmental risk. In Brazil, this project has the support of the Brazilian Business Council for Sustainable Development (CEBDS).

As a first step, this pilot project will develop an analysis framework for stress tests to include scenarios of economic resilience for major global industries when extreme droughts occur. The project will develop scenarios for five countries – Brazil, Mexico, China, USA and India.

For Marina Grossi, president of CEBDS, talking about water and the need to rationalize and understand the impacts of its use in a country that holds about 12% of all fresh water available on the planet is crucial. “The water risk was already pointed out at the meeting of the World Economic Forum, in Davos, as the main threat to the survival of our productive systems. Companies that still did not consider the impacts of a scenario of restrictions on water use in their strategic planning realized that they needed to prepare for situations of this type. At the same time, banks and investors are also preparing for this new scenario, studying how they should also create incentives that can privilege companies that are more efficient in the use of water”, he reflected.

This pioneering project, funded by the German Federal Ministry for Economic Cooperation and Development (BMZ, for its German acronym), will combine the latest advances in environmental science with modern risk projection techniques. The team responsible for the project chose RMS — a company specialized in developing models for catastrophes and working in partnership with academics from prestigious European universities and global research centers — to develop a drought scenario so that financial institutions can better understand their exposure to drought. environmental risks.

Nine international financial institutions, which hold more than US$ 10 trillion in assets, will help develop and test the analytical parameters to ensure the development of a homogeneous and systematic approach. The ultimate goal is for banks to be able to assess the financial risk, due to corporate financing, in case of extreme droughts. Are they:

China: Industrial and Commercial Bank of China (ICBC) Ltd

Brazil: Caixa Econômica Federal, Itaú, Santander

Mexico: Banorte, Banamex, Trust Funds for Rural Development (FIRA)

Switzerland: USB

USA: Citigroup

The project will be guided by a board composed of the most renowned experts in the field, including rating agencies such as S&P; global initiatives such as the UN Environment Program (UNEP FI); and scientific institutions such as the University of Cambridge.

Jorge Sobehart, director of Citi Risk Architecture, said: "Adjusting scenario modeling to reveal how external environmental shocks might affect the credit quality of certain industries will be useful for stress testing."

Liselotte Arni, director for Environmental and Social Risks at UBS, explains that “climate change is a global phenomenon, however its impact will be perceived differently in different geographies. This project will investigate new ideas as it takes into account local variations while stress testing the impact of drought scenarios on credit quality indicators across different industries and regions.”

The project will seek to build on the broader stress testing agenda for the environment. The Financial Stability Board, under its current chairman Mark Carney, and the G20 study group on Green Financing, under the current Chinese presidency, have highlighted environmental stress tests as being a crucial tool to ensure the sustainability of the financial system.

Nick Robins, Co-Director of Research at UNEP, comments: “This multidisciplinary project is very timely. Banks are starting to experiment with ways to assess their resilience to climate impacts. And financial regulators are exploring options for testing the consequences of environmental factors such as climate change.”

Yannick Motz, who manages the Emerging Markets Dialogue on Green Finance for GIZ, says: “The development of stress tests for the environment will help ensure the stability of our financial system and provide the foundation for financial institutions to develop strategies to the challenges of adapting to climate change and environmental degradation, while supporting the transition towards the development of a sustainable economy.”

Eric Usher, Co-Director of the Natural Capital Declaration and Acting Director of UNEP FI, comments: “This project will provide a practical step towards developing the capacity of banks to test their flexibility against increased financial risks due to changing conditions. environmental issues that can become an invisible problem for economic growth within the real economy.”

Daniel Stander, president of RMS, said: “This groundbreaking project will provide evidence that catastrophe modeling techniques have applications far beyond the industry that spawned them. This project has the potential to protect the GDP from the risk arising from the exposure of financial institutions to environmental risks. The project can also encourage corporations around the world to take sustainable steps in their business”.


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