1、The 2023 Climate Risk Landscape 1Contents|The 2023 Climate Risk LandscapeMarch 2023The 2023 Climate Risk Landscape 2Contents|AuthorsThis report was compiled and written by members of UNEP FIs 2022 Climate Risk and Task Force on Climate-Related Financial Disclosures(TCFD)Programme:David CarlinJosefin

2、e FalkDrew JohnsonWenmin LiLea LorkowskiThe project was set up,managed,and coordinated by UNEP FI,specifically:Remco Fischer and David Carlin.The authors would also like to express their gratitude to the following people for their contributions and reviews of this report:Julia BinglerBemnet Getachew

3、 MengistuGabriela Lopez-OnaPaul SmithSupportersThe project has been supported throughout the year by a group of 44 banks and investors convened by UNEP FI:ABN-AMROAccess BankAllied Irish Banks(AIB)Bank of America Bank of IrelandBanco Bilbao Vizcaya Argentaria(BBVA)Banco BradescoBank of Montreal(BMO)

4、Commercial International Bank Egypt(CIB)Canadian Imperial Bank of Commerce(CIBC)CitibanamexCity National BankCouncil of Europe Development Bank(COE)Credit Suisse Danske BankDesjardinsDen Norske Bank(DNB)European Bank for Reconstruction and Development(EBRD)Farm Credit CanadaFirst National BankFirstR

5、andForbright BankGoldman SachsHandelsbankenHongkong and Shanghai Banking Corporation(HSBC)Internationale Nederlanden Groep(ING)Intesa SanpaoloBanco Ita Unibanco S.A.(Ita)KBC Group NV(KBC)Mizuho BankMitsubishi UFJ Financial GroupNeue Aargauer Bank(NAB)NatWestNordic Investment Bank(NIB)RabobankRoyal B

6、ank of Canada(RBC)Scotia BankSovcom BankStorebrandToronto-Dominion(TD)BankTD Asset ManagementTD SecuritiesUBSWells FargoThe 2023 Climate Risk Landscape 3Contents|AcknowledgementsThe authors would like to thank all individuals who supported the development of this report and all the providers who sha

7、red information and insights.We are particularly grateful to the following providers for the time they invested in our piloting exercise.1BlackRock,Aladdin,andAladdinClimatearetrademarksofBlackRock,Inc.,oritsaffiliates2 Climate data and metrics,climate risk reporting and scenario analysis are provid

8、ed by MSCI ESG Research LLC.MSCI ESG and climate indexes and analytics utilize information from,but are not provided by,MSCI ESG Research LLC.MSCI equity indexes are products of MSCI Inc.and are administered by MSCI UK Limited Aladdin by BlackRock1 CLIMAFIN Entelligent Intercontinental Exchange(ICE)

9、(formerly,Urgentem)ISS ESG Moodys RMS Munich Re MSCI/MSCI ESG Research2 Oliver Wyman/S&P Global Ortec Finance Planetrics/McKinsey PwC The Climate Service(now a part of S&P Global)Willis Tower Watson XDIThe Cross Dependency InitiativeThe 2023 Climate Risk Landscape 4Contents|DisclaimerThis report was

10、 commissioned by the United Nations Environment Programme Finance Initiative(UNEP FI).UNEP FI shall not have any liability to any third party in respect of this report or any actions taken,or decisions made as a consequence of the results,advice,or recommendations set forth herein.This report does n

11、ot represent investment advice or provide an opinion regarding the transactions fairness to any parties.The views expressed herein are valid only for the purpose stated herein and as of the date hereof.Information furnished by others,upon which all or portions of this report are based,isbelievedtobe

12、reliablebuthasyettobeverified.Nowarrantyisgivenastotheaccuracy of such information.Public information and industry and statistical data are from sources UNEP FI deems reliable;however,UNEP FI makes no representation of the accuracy or completeness of such information and has accepted the information

13、 withoutfurtherverification.Noresponsibilityistakenforchangesinmarketconditions,laws,orregulations,andnoobligationisassumedtorevisethisreporttoreflectchanges,events,or states which occur after the date hereof.This document may contain predic-tions,forecasts,or hypothetical outcomes based on current

14、data,historical trends,and hypothetical scenarios.Any such predictions,forecasts,or hypothetical outcomes are subject to inherent risks and uncertainties.Actual results could be impacted by future events which cannot be predicted or controlled,including,without limitation,changes in business strateg

15、ies,the development of future products and services,changes in market and industry conditions,the outcome of contingencies,changes in management,changes in law or regulations,as well as other external factors outside of our control.UNEP FI accepts no responsibility for actual results or future event

16、s.UNEP FI shall have noresponsibilityforanymodificationsto,orderivativeworksbasedupon,themeth-odology made by any third party.This publication may be reproduced in whole or in partforeducationalornon-profitpurposes,providedacknowledgmentofthesourceismade.The designations employed and the presentatio

17、n of the material in this publica-tion do not imply the expression of any opinion whatsoever on the part of UN Environ-ment Programme concerning the legal status of any country,territory,city,or area or of its authorities or concerning the delimitation of its frontiers or boundaries.Moreover,the vie

18、ws expressed do not necessarily represent the decision or the stated policy of the UN Environment Programme,nor does citing trade names or commercial processes constitute an endorsement.The 2023 Climate Risk Landscape 5Contents|ContentsExecutive summary.9Introduction.11Section 1:Industry and regulat

19、ory developments.13Section 2:An overview of updates to the market for climate risk assessmenttools.162.1 Growing integration of different climate risks within tools.172.2 Updated scenarios and a growing focus on net-zero commitments in many tools.192.3 Improved data availability and transparency reg

20、arding tool methodologies.242.4 Development of user-friendly and purpose-built tools to meet disclosure needs.26Section 3:Overview of transition riskapproaches.293.1 Introduction to transition risk assessments.303.2 Climate Transition Scenarios.313.3 Transition risks.343.4 Risk assessment methodolog

21、ies.34Section 4:Overview of physical riskapproaches.394.1 Introduction to physical risk assessments.404.2 Physical risk scenarios.414.3 Physical hazards.454.4 Assessment methodology.46Section 5:Ways in which institutions can use climate tools.505.1 Navigating climate risk:use cases.515.2Exploringide

22、ntifiedusecases.525.3 Challenges institutions face in integrating the results into their own processes.62Section 6:A roadmap for financial institutions wishing to choose a risk assessment tool.64Conclusion.67Appendix .68References.75The 2023 Climate Risk Landscape 6Contents|List of figuresFigure 1:S

23、urvey results of important factors when choosing a vendor.25Figure 2:Survey results of challenges FIs are facing with vendors outputs.28Figure 3:Transition metrics landscape.35Figure 4:Bottom-up module sample .37Figure 5:Emissions of carbon dioxide across the RCPs.41Figure 6:Every tonne of CO2 emiss

24、ions adds to global warming.43Figure 7:The IPCC AR5 conceptual framework with risk at the centre.46Figure 8:Physical Climate Risk Assessment Process.47Figure 9:The roadmap to a low carbon bank of 2030,from Bank 2030.57Figure 10:Elements of Paris-aligned client engagement.57Figure 11:Identifying enab

25、lers and accelerators,inspired by WTW.59Figure 12:Climate tools as part of supervisory stress test.61Figure 13:A Roadmap for FIs in choosing a climate risk assessment tool.66List of tablesTable 1:Updates to the most commonly used major models:IPCC,IEA,and NGFS,as of December 2022.21Table 2:Transitio

26、n risks and indicators.34Table 3:Physical risk hazards and a selection of commonly used indicators.45List of annexesAppendix A:Overview of transition scenarios.68AppendixB:Financialandmacroeconomicdatavariablesforriskassessment.70Appendix C:Example analysis structure,deterministic,from ETH Zurich.71

27、Appendix D:Shared Socioeconomic Pathways in the IPCC Sixth Assessment Report.72Appendix E:Scenarios included in CMIP6.73Appendix F:Working Group II Contribution to the IPCC AR6 Report,Risk Propeller .74The 2023 Climate Risk Landscape 7Contents|AbbreviationsAbbreviationsAPSAnnounced Policies Scenario

28、AR5Fifth Assessment ReportAR6Sixth Assessment ReportBISBank of International SettlementsCAPEXCapital ExpenditureCCSCarbon Capture and StorageCO2Carbon DioxideCDRCarbon Dioxide RemovalCDSBClimate Disclosure Standards BoardCISLCambridge Institute for Sustainability LeadershipCLIMAFINClimate Finance Al

29、phaCMIP-6-projectCoupled Model Intercomparison Project COPConference of the PartiesCVaRClimate Value at RiskDDDistance to defaultEBITDAEarnings Before Interest,Tax,and DepreciationECBEuropean Central BankESGEnvironmental,Social,and GovernanceEUEuropean Union ETH ZrichSwiss Federal Institute of Techn

30、ology in ZrichEVElectric VehicleFAOThe Food and Agriculture Organization of the United NationsFIFinancial InstitutionFSBFinancial Stability BoardFPSForecast Policy ScenarioGDPGross Domestic ProductGFANZGlasgow Financial Alliance for Net ZeroGHGGreenhouse GasGtGigatonnesIAMsIntegrated Assessment Mode

31、lsIEAInternational Energy AgencyIFRSInternational Financial Reporting StandardsIMFInternational Monetary FundIMPIllustrative Mitigation PathwaysIPCCIntergovernmental Panel on Climate ChangeThe 2023 Climate Risk Landscape 8Contents|AbbreviationsIPRInevitable Policy ResponseIRENAInternational Renewabl

32、e Energy AgencyISSBInternational Sustainability Standards BoardLGDLoss Given DefaultNDCsNationally Determined ContributionsNFRDNon-Financial Reporting DirectiveNGFSNetwork for Greening the Financial SystemNGONon-Governmental OrganisationNLPNatural Language ProcessingNZAOANet-Zero Asset Owner Allianc

33、e NZBANet-Zero Banking AllianceNZEIEA Net Zero by 2050 ScenarioOECMOne Earth Climate ModelOPEXOperating ExpendituresPACTAParis Agreement Capital Transition AssessmentPATPortfolio Alignment TeamPDProbability of DefaultPRAPrudential Regulation AuthorityPRIPrinciples for Responsible InvestmentQFTsQuart

34、erly Forecast TrackersRCPsRepresentative Concentration PathwaysRMIRocky Mountain InstituteRPSRequired Policy ScenarioSASBSustainability Accounting Standards BoardSDGsSustainable Development GoalsSFDRSustainable Finance Disclosure RegulationSSPsShared Socioeconomic Pathways STEPSStated Policies Scena

35、rioTCFDTask Force for Climate-related Financial DisclosuresTCSThe Climate ServiceUNEP FIUnited Nations Environment Programme Finance InitiativeUNFCCCUnited Nations Framework Convention on Climate ChangeVRFValue Reporting FoundationWBCSDWorld Business Council for Sustainable DevelopmentWEFWorld Econo

36、mic ForumWEOWorld Energy OutlookWMOWorld Meteorological OrganizationWRIWorld Resources InstituteXDCX-Degree CompatibilityExecutive summaryThe past few years have demonstrated a remarkable level of volatility.Efforts to estab-lish a“new normal”after the COVID-19 pandemic were interrupted by the Russi

37、an invasion of Ukraine,and a wave of food and energy crisis.Central bankers have contin-ued to raise interest rates to tame inflation,ending the“lower for longer”regime that has persisted since the Global Financial Crisis.Amid these changes,societies must contend with the worsening effects of human-

38、caused climate change and the critical economic transition to a net-zero emissions future.The impacts of climate change and the necessary transition will impact almost every human and natural system.Success-ful companies and communities will be ones that are resilient in the face of these challenges

39、.Developing climate resilience and contributing to a sustainable future requires action today.Organisations that recognize this are seeking to better understand their climate risks and opportunities and the strategies they should pursue.Climate risk tools can assist in the decision-making process an

40、d by validating climate strategies and uncov-ering new insights about climate risk.The pace of development and deployment of climate risk tools within the financial sector has been breath-taking.UNEP FIs 2023 Climate Risk Landscape report aims to assist financial actors in better understanding this

41、diverse and dynamic landscape of climate risk tools.The report explores the major market trends in both physical risk and transition risk tools and provides detailed analysis on dozens of individual tools.Some of the key findings found within the report are as follows:Greater integration of differen

42、t climate risks within toolstool providers have recog-nised the need for financial institutions to understand the full range of climate risks faced by a counterparty of portfolio.This has led to the expansion of integrated phys-ical and transition risk tools as well as additional coverage of specifi

43、c hazards within physical and transition risk assessments.This work is still ongoing and many risk inter-action effects and tipping points are not typically captured.Focus on net-zero commitments within toolsas countries and companies around the world set ambitious targets for reducing greenhouse ga

44、s emissions,climate risk tools are being developed to help them set targets,assess their alignment,and implement their net-zero strategy.That has included the incorporation of a greater range of net-zero scenarios within tools as well as greater granularity for sectoral decarbonisation pathways.Risi

45、ng regulatory demands are accelerating tool use and functionalitymandates for climate-related financial disclosures have come into effect in jurisdictions across the world.Regulatory climate scenario exercises and climate stress tests are becoming The 2023 Climate Risk Landscape 9Contents|Executive

46、summarymore common as well.This regulatory pressure has both expanded the demand for climate risk tools and also resulted in a growing suite of purpose-built tools,designed to address climate disclosures and scenario exercises.New data and new insights are top priorities for financial institutionsma

47、ny institu-tions involved in UNEP FIs working group on climate risk tools expressed a desire for tools to continue to progress on addressing data gaps and offering decision-useful information.As climate tools become more central to financial analysis,institutions appear excited to explore leading-ed

48、ge data and decisioning techniques such as those offered by geospatial data and machine learning algorithms.These trends and many others are explored in greater depth throughout the report.The report is structured into the sections noted below.Section 1:Industry Regulatory DevelopmentsSection 2:An o

49、verview of updates to the market for climate risk assessment toolsSection 3:Overview of transition risk approaches(contains the detailed table on transition risk tools)Section 4:Overview of physical risk approaches(contains the detailed table on physical risk tools)Section 5:Ways in which institutio

50、ns can use climate toolsSection 6:A roadmap for financial institutions to choose a risk assessment toolThe 2023 Climate Risk Landscape 10Contents|Executive summaryThe 2023 Climate Risk Landscape 11Contents|IntroductionIntroductionAs the importance of integrating climate change-related risks into eco

51、nomic projections isbeingrealised,manyfinancialinstitutions(FIs)havebeenlookingforeffectivewaystounderstandandquantifythefinancialrisksfromclimatechangeinordertoformanappropriate response.These risks are divided into two categories:physical and transition risks.Physicalrisksrefertorisksresultingfrom

52、environmentaleventssuchasfloods,wildfires,andlandslides,amongmanyothers.Incontrast,transitionrisksareassoci-ated with policies,technologies,laws and similar actions designed to shift the economy toward lower fossil-fuel consumption(FSOC,2021).FIs also should take further steps to consider a third ca

53、tegory of risksnamely,those related to legal liability(i.e.litigation).Litigation risks can include people and businesses seeking compensation for losses associated with physical or transition risks,or legal challenges that require a certain course of action(PRA 2021).Although physical and transitio

54、n risks exist in their own categories,climate-related litigation can exacerbate these risks(NGFS,2021).These different climate-related risks are screened and assessed using risk assessment tools that utilise existing data and projecting methodologies provided by different vendors.Due to the expandin

55、g market for climate risk assessment tools,FIs can choose from a variety of vendors and their respective climate risk tools.In that context,there is a growing commitment to the Paris Agreement to keep global warming below 2C so as to achieve a net-zero state by 2050(United Nations,2015).In response

56、to this challenge,climate risk tools play a crucial role in identifying and measuring hotspots of greenhouse gas(GHG)emissions in portfolios.In this way,they contribute to managing net carbon emissions and bringing them to net zero by 2050.Since the Financial Stability Board(FSB)s TCFD recommendatio

57、ns in 2017,UNEP FI has conducted a series of piloting exercises.It has also developed publications to include physical and transition risk assessment tools.FIs have deployed these to understand thepotentialimpactofclimatechangeintheirrespectivefields.Thestartofthepilotingseries,known as Phase I of t

58、he TCFD Banking Program,collaborated with Oliver Wyman and Acclimatise to develop an approach for evaluating corporate lending portfolio expo-sure to transition and physical risks under different climate scenarios(UNEPFI,2018).In 2019,UNEP FI designed Phase II of the UNEP FI TCFD Banking Program to

59、help FIs expand their toolkit for climate risk assessment and disclosure,exploring climate scenar-ios,data and methodologies,and reporting and governance issues(UNEP FI,2020).FollowingthefinalisationofPhaseII,UNEPFIhascontinuedtocontributetotheclimaterisk assessment universe through in-depth researc

60、h and publications.The UNEP FIs The Climate Risk Landscape report,hereby referred to as the 2021 Landscape Report,aimstoinformfinancialinstitutionmembersaboutthesimilaritiesanddistinctionsamong current climate risk assessment tools.It elaborates on the types of climate-re-The 2023 Climate Risk Lands

61、cape 12Contents|Introductionlated risk evaluated by these tools,their analysis level,and their focus sectors.FIs can choose from the vast number of climate risk tools and can work with a vendor that caters to their investment and environmental goals.An overview of current trends and challenges in th

62、e climate risk tools market coupled with an understanding of the methodology and assumptions of these tools,helps FIs make an informed start in theirsearchforspecificvendors.Followingthefirstlandscapereport,thecasestud-ies presented in UNEP FIs 2022 The Climate Risk Landscape:Tool Supplement,hereby

63、referred to as the Tool Supplement,incorporate the perspectives of FIs working with different tool providers.This programme allowed participating FIs to gain insights into how different vendors accomplish climate risk assessments.In return,vendors received recommendations on improving their methodol

64、ogies and user access.Stemming from the physical and transition risk outlines summarised in the 2021 Land-scape Report and Tool Supplementpublications,thisreportfirstcoversthedevelop-ments from the two most recent annual Conference of the Parties(COP)meetings and relevant regulatory updates that fol

65、lowed in the past year.It moves on to discuss the advancements in different climate risk assessment tools,their methodologies and scenario usage,general trends and challenges observed in the market,use cases,and a roadmap to help FIs choose and utilise commercially available tools in this market.Thi

66、s paper aims to provide insights into the differences between vendors regarding how their climate risk tools process input data and how FIs can interpret the given output assess-ments into their sustainability goals.The information included in this paper can guide organisationssearchingforspecificcl

67、imatesolutionsthatalignwiththeirglobalandinstitutional climate-related commitments.The continuation of this research programme also seeks to provide transparency on the providers offerings so that organisations can fosteracollaborationthatisbeneficialtothem.Important to note for this report and beyo

68、nd is that the world is currently experiencing a climate crisis,with rising global temperatures and increasingly extreme weather events suchasheatwaves,droughts,andfloods.Tomentionafewexamples,2022broughtdevastatingfloodsinPakistan,scorchingheatwavesinEurope,andtragicwildfiresinAustralia and Califor

69、nia.The evidence of this crisis is undeniable,and immediate action is needed to address the causes of climate change and mitigate its effects on commu-nities and ecosystems.The climate crisis is not a future eventit is happening now.SECTION 1:Industry and regulatory developmentsThe 2023 Climate Risk

70、 Landscape 14Contents|Industry and regulatory developmentsLooking back,COP26 launched a wave of private-sector commitments to battle climate change.These gathered momentum in 2022 and have continued up to the writing of this report.At COP26 in 2021,a coalition of over 450 FIs controlling over US$130

71、 trillion in assets came together to form the Global Financial Alliance for Net Zero(GFANZ).Collec-tively this group committed to pursue an economy-wide transition to net-zero emissions.GFANZ is the worlds largest partnership of FIs,comprising of seven net-zero alliances.It supports the members of t

72、hese alliances with tools and frameworks in order to assist them in realising their net-zero commitments.GFANZs efforts centre on a small number ofspecificfocusareas.OneoftheseistheprovisionofguidancetoFIsregardingtheadoptionandimplementationofeffectivetransitionplans.Itdefinessuchplansas“aset of go

73、als,actions,and accountability mechanisms to align an organisations business activities with a pathway to net zero.This should be consistent with achieving net zero by 2050 at the latest”(GFANZ,2022).Throughout 2022,GFANZ has published numerous supplemental guidance documents toassistFIsintheirtrans

74、itionplanning.Inparticular,thisinformationisassistingfirmstodevelop credible net-zero transition plans.Other outputs include assistance in determin-ing the impacts of a net-zero world on the real economy and in developing metrics for the alignment of FIs portfolios with net zero.In addition,the docu

75、mentation contributes toafullerunderstandingofthephaseoutoffinancingandoperationsofhigh-emittingassets.This alliance has enabled net-zero commitments to become mainstream in the financialsector,withover550financialfirmsassignatories.AnotherencouragingfactisthatmembersofthealliancesunderGFANZspecific

76、ally,participantsintheNet-ZeroBanking Alliance(NZBA)have committed to using science-based targets of 1.5C scenarios.InGFANZswords,thesetargetsformthe“backboneoftransitionplansandthe bedrock of a 1.5-aligned economy”(GFANZ,2022).Asnetzerogoesmainstreamwithinthefinancialsector,climatefinanceisbeinginc

77、reas-ingly recognised for its critical role in supporting the actions needed to combat climate change.TofillfinancinggapsundertheParisAgreementforbothmitigationandadapta-tion,developed countries need to provide at least US$100 billion a year in climate capital.For their part,developing countries are

78、 facing adaptation costs of up to US$340 billion per year by 2030,increasing to US$565 billion per year by 2050.This is in addition to mitigation costs of up to US$850 billion per year by 2030(IFAD,2022).The global gap is large and continues to widen.The pressing need to scale up commitments around

79、climatefinancehasbecomeoneofthereasonswhyclimateriskassessmenttoolsrelated to opportunity and transition readiness are crucial for FIs.Alongsidefinancialcommitments,theneedexistsforagreementoninvestmentcriteriaand proper risk management aligned with a low-carbon economy.New regulations have rapidly

80、evolved in recent years.Notably,the European Union Taxonomy Regulation(EU Taxonomy)came into force in July 2020.This set six environmental objectives;climate change mitigation,climate change adaptation,the sustainable use and protection of water and marine resources,the transition to a circular econ

81、omy,pollution prevention and control,and the protection and restoration of biodiversity and ecosystems.The EU taxonomyprovidedaclassificationsystemandsetouttheworldsfirstgreenlistofsustainable business activities(PwC,2021).This regulation also placed new taxono-my-linkeddisclosureobligationsoncompan

82、iesandfinancialmarketparticipantsbyThe 2023 Climate Risk Landscape 15Contents|Industry and regulatory developmentsamending disclosure requirements in the EUs Non-Financial Reporting Directive(NFRD)and the Sustainable Finance Disclosure Regulation(SFDR)(ESG Enterprise,2021).These actions have enhance

83、d transparency on businesses social and environmental impact,whilealsoelevatingpressureonfinancialorganisationstoobtainacompleteoverviewof their climate-related exposures.These rules came into effect in 2022.At COP26,the International Financial Reporting Standards(IFRS)Foundation announced the creat

84、ion of the International Sustainability Standards Board(ISSB).The board aims to provide a global baseline for sustainable disclosures that outline the climate-related risks and opportunities that are most relevant to investors and the capital markets(IFRS,2022).The ISSB standards will attempt to con

85、verge global standards and build upon existing voluntary standards such as the TCFD,the Value Reporting Foundation(VRF)s Integrated Reporting(IR)Framework,the Sustainability Accounting Standards Board(SASB)standards,the Climate Disclosure Standards Board(CDSB)Framework,and the World Economic Forum(W

86、EF)s Stakeholder Capitalism Metrics.Though the ISSBs proposed measures are not currently mandated,the G7 Finance Ministers and Central BankGovernorshaverecentlyreaffirmedtheircommitmenttomovetowardsmandatoryclimate-relatedfinancialdisclosures.Thus,theyhavewelcomedISSBtoworkondefiniteglobalbaselinest

87、omobilisesustainablefinance(IFRS,2022).As mandates for public disclosures of climate-related risks unfold in various jurisdictions,so will the need for FIs to conduct rigorous evaluations of how their assets contribute to climate change as well as their exposure to its impacts.Central bank climate s

88、tress testing has expanded as a risk management practice in the financialsector.TheEuropeanCentralBank(ECB)andBankofEnglandbothcarriedoutsuch tests in 2022,for instance,with the US Federal Reserve(Fed)planning to follow suit with a climate scenario exercise in 2023.In the case of the ECB,European ba

89、nks were assessed for the robustness of their current stress testing frameworks.Attention was also given to their capacity to produce climate risk factors and stress test projections,along with transition risks and acute physical risk events.A core part of stress testing exercises carried out by cen

90、tral banks is climate scenario analysis.This provides insights intotherisksandopportunitiesthatmayimpactafirm,itsclients,anditsmarketinachangingworld.Todate,centralbanksandfinancialregulatorsfrom31nationshaveemployed climate scenario analysis as a means of assessing the impact of climate risks onthe

91、financialsystemandtheoveralleconomy,accordingtotheScenarios in Action report published by the Network for Greening the Financial System(NGFS)(NGFS,2021).Scenario analysis has increased the need for institutions to improve their quantitative capabilities with respect to the carrying out of climate as

92、sessments.This is because suchassessmentsareseenascriticalnotjustforstresstestingbutalsoforofficialdisclosures and for internal strategy.Consequently,the market expects growing demands from FIs for assessment tools that provide more accurate and quantitative data.SECTION 2:An overview of updates to

93、the market for climate risk assessmenttoolsThe 2023 Climate Risk Landscape 17Contents|An overview of updates to the market for climate risk assessmenttoolsA summary of the most recent developments in the climate risk tool landscape.1.Growing integration of different climate risks within tools2.Updat

94、ed scenarios and a growing focus on net-zero commitments 3.Improved data availability and transparency regarding tool methodologies 4.Development of user-friendly and purpose-built tools to meet disclosure needs2.1 Growing integration of different climate risks within toolsSince the 2021 Landscape R

95、eport and the Tool Supplement,numerous developments and trends have emerged in the tool market.Firstly,tool providers faced rising demand to offer integrated solutions.Past landscape reports by UNEP FI into risk assessment tools revealed that most tools covered either physical or transition risk.How

96、ever,feed-back during our recent piloting exercise demonstrated a growing desire among banks to see physical and transition risks covered in the same platform as an integrated solu-tion.Recently,the tool provider industry has witnessed considerable consolidation and mergers.Thishasresultedinaconcent

97、rationofprovidersamongbothestablishedfirmsand newly merged providers.This trend has also spread to the business consulting and accounting sectors.This process of consolidation allows vendors to better meet banks needs and to improve their capabilities.Joining their expertise around modelling,scenar-

98、ios,and data,for instance,enables providers to offer a more enhanced approach to assessing climate risk.Increase in partnerships and acquisitionsThe Tool Supplement highlighted the partnership between Oliver Wyman and S&P Global to create Climate Credit Analytics.The tool presently focuses on transi

99、tion risks,but the providers indicate plans to expand coverage to physical risks in the near future.Addition-ally,S&P Global acquired The Climate Service(TCS)and its integrated risk Climanomics platform in January 2022.The risk tool market landscape also features some new part-nerships.InJune2021,fo

100、rinstance,US-basedinvestmentmanagementfirmBlackRockacquired Baringas Climate Change Scenario Model and announced a long-term partner-ship focused on innovation and ongoing co-development of transition risk models.Black-Rock has also established a partnership with Rhodium Group on the physical risk s

101、ide.This has seen it acquire additional models.Other recent acquisitions include Moodys Analytics purchase of RMS,Four Twenty Seven,and Vigeo Eiris,and McKinseys move to buy Planetrics and Vivid Economics.WTW acquired the physical risk consultancy Accli-matise and Climate Policy Initiative Energy Fi

102、nance in 2021 and the Butterwire research platform in 2022.In July 2022,Intercontinental Exchange(ICE)announced the acquisi-tion of Urgentem.ICE has incorporated its existing physical climate risk solutions with Urgentems emissions database and transition risk analytics in order to provide a full su

103、iteofsustainablefinanceservices(Basar,2022).Further,Quantis joined the Boston Consulting Group to accelerate sustainable transformation.Most recently,in Novem-ber 2022,McKinsey Sustainability and Moodys Analytics announced their intention to join forces.This collaboration will bring together complem

104、entary strengths of both companies:on the one hand,Moodys brings its deep physical climate risk and credit risk modelling capabilities;on the other,McKinsey Sustainability offers its extensive exper-tise in modelling transition and physical risk,as well as in advising FIs on integrating climateriski

105、ntobusinessprocessesandreducingfinancedemissions(McKinsey,2022).Individual tools have also evolved their risk methodologies to take on a more integrated approach.PwCs Climate Excellence tool was previously listed as only assessing transi-tion risks,but,as of mid-2021,it also offers coverage of acute

106、 and chronic physical risks.Improved coverage of climate risksClimate risks include both physical and transition risks that come from disruptive events.Physicalhazardssuchasheatwaves,floods,andwildfires,areeventsorconditionsthathave the potential to cause harm to people or the environment.At the sam

107、e time,transi-tionrisksfocusonthefinancial,economic,andsocialrisksrelatedtolargecarbonemis-sion reductions and decarbonisation.The world is witnessing an increase in migration as individuals seek to relocate in hopes of escaping poverty,disease,and malnutrition resulting from changing ecosystems.Mor

108、e services offering comprehensive physical hazards and transition risks are now entering the market.Munich Re,for example,has a Location Risk Intelligence tool that now includes a natural hazard edition covering 18 physicalhazards.Meanwhile,XDIcomplementsitsassetspecificanalysiswithaddi-tionalmeasur

109、esofcontextualrisk,includingfirstmilerisk,regionaleconomicrisk,andproxies for sector-based supply chain risk.Another example of improvement is in the coverage of Scope 3 emissions.Providers such as ICE,ISS ESG,and S&P/TCS are now offering more granularity in this regard.As a consequence of the marke

110、t integration seen in recent years,more second-order effects of climate impacts are now also getting addressed.The overall effect is to shed more light on the consequences of climate change.Interestingly,thecausativefactorsnowbeingidentifiedandmappedbyprovid-ers are shown to be broader than previous

111、ly might have been expected.The 2023 Climate Risk Landscape 18Contents|An overview of updates to the market for climate risk assessmenttoolsThe 2023 Climate Risk Landscape 19Contents|An overview of updates to the market for climate risk assessmenttools2.2 Updated scenarios and a growing focus on net

112、-zero commitments in many tools The mainstreaming of net zeroTherapidactivitywitnessedintheprivatesectorreflectstheurgencytopushforanimmediate and all-encompassing transition towards decarbonisation.The international scientificcommunityagreesthattheglobalaveragetemperaturemustbekeptbelow1.5C above p

113、re-industrial levels in order to avoid the worst possible climate outcomes and the crossing of tipping points.In recent years,a global consensus on the need to limit warming to 1.5C and reach net-zero CO2 emissions by 2050 has taken place.This hasbeenheavilyinfluencedbytheIntergovernmentalPanelonCli

114、mateChange(IPCC)sSpecial Report on Global Warming of 1.5C report,which showed that the harmful effectsof2Cofwarmingweremuchmoresignificantthanthoseof1.5C.Increasingly,governmentsareeitherproposingfirmnet-zerogoalsorconsideringdoingso.Atpres-ent,over 91%of global GDP(representing 83%of global GHG emi

115、ssions)is captured by government net-zero targets(Net Zero Tracker,2022).Private-sector actors have alsomadecommitmentstodecarboniseandaredevotingresourcestosettingspecifictargets and beginning their journeys to net zero.This growing focus on net zero has required tool providers to ensure that they

116、include 1.5C pathways in their offerings.Firms that have made net-zero commitments are look-ing to set their targets using clear pathways to 1.5C with the assistance of alignment tools.Supervisors have shown increasing interest in 1.5C scenarios as the goal of net zeroemergesasafirmaspirationandamai

117、nstreamgovernmentalpolicy.Asaresult,new 1.5C transition pathways developed by organisations like the NGFS and Interna-tional Energy Agency(IEA)are now integrated into many tools.Providers like Moodys Analytics,ICE,CLIMAFIN,Oliver Wyman/S&P Global,BlackRocks Aladdin Climate,and Ortec Finance already

118、offer Net Zero 2050 scenarios on their tools.The MSCI organisa-tion added the NGFS scenarios in early 2022 and supplementary IPCC scenarios for the physical risk assessment towards the end of the same year.In the near future,ISS ESG is also expected to incorporate the NGFS scenarios into its climate

119、 risk evaluation tools.Similarly,WTWs methodology includes orderly transition to 1.5C among nine scenarios.For its part,Planetrics provides an assessment underneath orderly transition scenarios,including net-zero 2050 and below 2C.In addition,it incorporates disorderly scenarios for Divergent Net Ze

120、ro and Delayed Transition,with a policy ambition of 1.41.6C as well as the Inevitable Policy Responses(IPR)Forecast Policy Scenario(FPS)and 1.5C Required Policy Scenario(RPS).Such moves are evident among organisations outside this years working group.The Cambridge Institute for Sustainable Leadershi

121、p(CISL)provides a case in point.In its publication Targeting Net Zero,CISL has included the ClimateWise physical risk framework within its overarching Net-Zero Framework for FIs.Anet-zeroframeworkexplainsthedetailsofafinancialinstitutionsstrategicresponseto net zero through business models.The 2023

122、Climate Risk Landscape 20Contents|An overview of updates to the market for climate risk assessmenttoolsUpdated scenariosIn addition to the growing focus on 1.5C,scenarios have been updated more broadly,providing greater detail into sector behaviour under various decarbonisation scenarios.The IPCC pr

123、ovided an updated set of scenarios for tool providers to draw on.These scenariosreflectnewerassumptionsaboutelementssuchasrenewables,governmentpolicies,and the latest carbon budget in the Working Group III(WGIII)contribution to the Sixth Assessment Report(AR6)report(IPCC,2022).Thefinalsynthesisrepor

124、tisexpected to be published in 2023(IPCC,2022).The IEA has updated its Net-zero Emis-sions by 2050 Scenario(NZE),offering a comprehensive account of how policymak-ers and others could respond coherently to the challenges of climate change,energy affordability,and energy security(IEA,2022).This follo

125、ws the IEAs 2021 Net Zero by 2050 roadmap for the global energy sector to achieve net zero.In this publication,the IEA explored the implications of the NZE for the economy,the energy industry,citizens,and governments.In September 2022,the NGFS published its third set of climate scenarios,which incor

126、-porated countries commitments to reach net-zero emissions,increased sectoral gran-ularity,and improved representation of physical risk(Mazars,2022).The Principles for ResponsibleInvestments(PRI)InevitablePolicyResponse(IPR)scenariosreflectlikelypolicy developments based on a granular assessment of

127、government commitments and policies currently under consideration(PRI,2023).At the same time,industry experts are exploring the decarbonisation pathways for individual sectors.The publication of an academic article in the journal,Nature Climate Change,about reducing carbon in the US residential sect

128、or is one illustrative example of a wider trend.Tool providers are now integrating the latest transition scenario and assumption updates into their tools toreflectthespeedatwhichsocietyisactingandtheeconomyisshifting.MoodysAnalytics now has the capability to include additional macroeconomic variable

129、s to NGFS,forinstance,showingtherelationshipbetweenthepredefinedNGFSassumptionsandthe overall economy.BlackRock,MSCI,ICE,Planetrics,Oliver Wyman/S&P Global,and PwC are examples of some providers that are using the latest NGFS scenarios,and we anticipate that more will do so in the future.The 2023 Cl

130、imate Risk Landscape 21Contents|An overview of updates to the market for climate risk assessmenttoolsTable 1:Updates to the most commonly used major models:IPCC,IEA,and NGFS,as of December 2022Model General UpdatesScenario Specific UpdatesIPCCWorking Group III contribution to AR6:Alignment to 1.5C s

131、cenarios is still possible but will require rapid and deep decarbonisation in all sectors.Renew-ables or fossil fuels with carbon capture and storage(CCS)will help achieve the necessary emissions reductions.Carbon dioxide removal(CDR)technology will balance residual GHG emissions.An expansion of pol

132、icies and laws addressing mitigation have avoided excess emissions,but progress is uneven.Paris-Alignedfinancialflowsarelagging.The GHG emissions drivers of the Shared Socioeconomic Pathway(SSP)scenarios are global population growth of 8.59.7 billion people by 2050 and GDP increases of 2.74.1%per ye

133、ar from 20152050.Illustrative Mitigation Pathways(IMP):Show mitigation strategies to achieve rapid decarbonisa-tion,focusing on renewables,achieving negative GHG emissions,low energy demand,shifting development pathways,and gradual strengthening of near-term mitigation actions.These IMPs are associa

134、ted with below 2C and 1.5C scenarios,andsomeareclassifiedalongsideSSP11.9.SSP24.5:Global consumption-based carbon dioxide(CO2)and CH4 emissions in urban areas are expected to increase from 29 to 34 Gt in 2050.SSP37.0:Global consumption-based CO2 and CH4 emissions in urban areas increase up to 40 Gt.

135、This pathway assumes slow technological change,high population growth,and high fragmentation,which could mean that warming pathways of 2C or less maynotprovefeasible(mediumconfidence).SSP58.5:This pathway would assume a reversal of current technology and/or mitigation policy trends(mediumconfidence)

136、.IEA2022 World Energy Outlook(WEO):Provides key insights into how responses to the current global energy crisis sparked by Russias invasion of Ukraine ties into its future scenario assumptions.Government policy responses are putting a clean energy economy and a fossil-fuel peak into view in their up

137、dated model assumptions.Stated pledges will help in the climate fightbutthereisstillagapbetweencurrent ambitions and a 1.5C future.1.5C achievement will ultimately come down to the speed and total investment in an economy built on clean and affordable energy,enabled by effective policymaking and inc

138、entives.STEPSStated Policies Scenario:Energy-related CO2 emissions plateau and fall around 2050,lead-ing to a rise of 2.5C in global average temperature by 2100.Global energy demand growth of around 1%per year by 2030 is met almost entirely by renewables.It projects a global peak demand for fossil f

139、uels such as coal in the coming years,natu-ralgasflatteningby2030,andoilinthemid-2030s.NZE2050Net-zero Emissions by 2050:CO2 emis-sions fall to 23 Gigatonnes(Gt)by 2030 and to zero by 2050.There is a 50%increase of global energy demand by 2050,mostly coming from emerging economies.Getting to net zer

140、o requires a tripling of spending on clean energy and infrastructure by 2030.Achieving the NZE pathway is narrow but achievable with the necessary policy and technol-ogy advances.APSAnnounced Pledges Scenario:Fossil-fuel demand is put into decline by 2030.GHG emis-sions peak in the mid-2020s and fal

141、l to 12 Gt in 2050,which is associated with a temperature increase of 1.7C by 2100.Increases in global clean energy manufacturing are a driving factor for rapid deployment of clean technology.NGFSUpdated NGFS Scenarios for central banks and supervisors:Includes country-level commitments to net zero

142、at COP26 until March 2022.Incorporates the most updated trends in solar,wind,and other key mitigation technologies.GDP and population data assumption updates from the IMF World Economic Outlook 2021.Short and long-term effects from the war in Ukraine are excluded.Contains a more detailed representat

143、ion of physical risk,including acute risks.Transition risks are represented with increased granularity in the transportation and industrial sectors.Current Policies Scenario:GDP losses up to 2100 are the highest in physical risk scenarios(up to 20%relative to prior trend).Limited transition risk isr

144、eflectedbylowimpacttomacroeconomicvari-ablessuchasunemploymentandinflation.Disorderly Scenarios:GDP losses from transition risks are highest,due to a combination of transition speed and investment uncertainty.Policy uncer-tainties could lead to higher investment premiums in the short term(i.e.two ye

145、ars);these level off thereafter.Net-zero 2050:Moderately negative GDP losses,with a balance of costs from carbon prices and overall energy costs,with recycling of carbon revenues into policy investments and employment taxes.The 2023 Climate Risk Landscape 22Contents|An overview of updates to the mar

146、ket for climate risk assessmenttoolsThe 2023 Climate Risk Landscape 23Contents|An overview of updates to the market for climate risk assessmenttoolsAdditional time horizonsShort-term horizons Along with updating the number and range of scenarios offered,tool providers are extending their time horizo

147、ns.Tool providers started to include short-term time horizons on their platforms as analysts need to consider the effects of current climate shocks on theirassets,suchasthe2020AustralianwildfiresandrecentcatastrophicfloodinginCalifornia in Pakistan,as well as the drastic temperature rises across Eur

148、ope in Summer 2022(the hottest on record).The low-carbon transition also needs to happen quickly and in an orderly fashion in the short term.Further,the short-term transition targets are essential features of transition plans.Hence,it is crucial for investors to under-stand howbased on long-term sce

149、narios with short-term interim stepsthe targets of corporates align with the speed and scale of interim measures required to achieve them.Entelligents transition risk(T-risk)scoring measures the short-term(two-year)pricemovementsofcorporateequitiesandfixedincomeofclientportfolios.Thescor-ing system

150、is updated on a quarterly basis.On the physical risk side,Munich Re has a featuretotrackthefinancialimpactsofclimateeventssuchashurricanesinreal-time.This live analysis is available through its location risk intelligence feature.These tools can also help identify potential climate-related risks.That

151、 said,they cannot alwayscapturetheveryshorttimehorizonofsomespecificextremeweathereventsand other hard-to-predict hazards.In addition,providers also started to project transi-tion risks in the medium and long term to align for an orderly transition.The Climate Credit Analytics tool offered by Oliver

152、 Wyman/S&P Global provides an extreme short-term scenario featuring a three-year carbon tax.Planetrics provides in-year impacts and can support on-custom,short-term scenario development.In sum,it is important to note that no climate model can predict certain incidents with 100%accuracyorhighlightspe

153、cificweathereventswiththesameaccuracyasreal-time weather forecasts.What climate models offer is a probability range.They can also project changes in the frequency and intensity of extreme weather events.In this way,theyhelpintheidentificationofareasatincreasedriskofhazards.Othertoolscanalsobeusedtop

154、redictspecificweatherevents.Anexampleisnumericalweatherprediction,which may have higher resolution and which can provide more accurate forecasts in the near term.Long-term horizons It is essential to measure both physical and transition risks in the long term because of the dynamics of climate chang

155、e and decision-making.The current policies regarding carbon pricing,abatement technology developments,and net-zero commitments pave the way towards a future that is path-dependent on present developments.Therefore,tool providers need to offer long-term time horizons so that banks can see what their

156、futureassetscouldlooklikebasedonpolicyandfinancialdecisionstakentoday.MSCI,CLIMAFIN,BlackRocks Aladdin Climate,JBA,Munich Re,XDI,Moodys Analytics,South Pole,ISS ESG,The Climate Service/S&P Global,ICE,and Ortec Finance all provide time horizons extending until 2100,while McKinseys Planetrics can cond

157、uct long-term anal-ysis outside of its platform.The 2023 Climate Risk Landscape 24Contents|An overview of updates to the market for climate risk assessmenttools2.3 Improved data availability and transparency regarding tool methodologies Faced with more pressure from FIs,regulators,non-governmental o

158、rganisations(NGOs),andcorporatesfromtherealeconomy,thetoolprovidersareimprovingandrefiningtheirmethodologies and approaches.WTW,for instance,has applied an innovative approach toexpandcoverage,combiningnaturallanguageprocessing(NLP)withfinancialdata-basedmachinelearningtoanalysepublic,private,andfix

159、ed-incomeproducts.Method transparencyThere are certain challenges and limitations that these tools might never be able to over-come because of the uncertainty of climate change or because of the limitations of modelling and data.Despite these constraints,providers can enhance representations of unce

160、rtainty through qualitative methods or through the implementation of shock scenar-ios.Furthermore,the execution of multiple scenario analyses and sensitivity analyses within individual scenarios(i.e.Monte Carlo simulations)can provide a comprehen-sive understanding of the sensitivity of results to a

161、ssumptions and parameters,shed-ding light on known unknowns.Additionally,it is crucial for providers to communicate openly and honestly about the limitations of their analysis and the potential presence of unknown unknowns.Climate change does not necessarily follow a linear trajectory.Furthermore,it

162、s shocks do not follow a normal distribution,with tail-end catastrophes and tipping points as real possibilities(Battiston et al.,2017).Climate analytics company CLIMAFIN has been upfront and transparent about general climate uncertainty in the Integrated Assess-ment Modelling(IAM)and emphasised the

163、 additional uncertainties of model choice and policymaker unpredictability.They also pointed out that the metrics banks used to makedecisionsortoreportfinancialdisclosuresareentirelydependentonthechosenscenarios and a models underlying economic assumptions,such as the utility curve,the expected rate

164、 of future production,and the estimated social cost of carbon.Addition-ally,Planetrics provides multiple sensitivity analyses to test uncertainty.It also offers transparent documentation to ensure the validity of its model.Even if the modellers of thetoolscouldaccuratelypredictthecostsandbenefitsofa

165、particularpathway,therealisation of that pathway still needs to be ascertained because of assumptions about the rationality and aggressiveness of policymakers.When tool providers are open about how their models and methodologies work,banks can better understand the risk their portfolios face and the

166、refore produce more responsible and effective reports.Most FIs surveyedflaggedtransparencyasoneofthemostimportantfactorswhenchoosingorcollaborating with a vendor.The 2023 Climate Risk Landscape 25Contents|An overview of updates to the market for climate risk assessmenttoolsWhat do you find most impo

167、rtant when choosing/collaborating with a vendor?PrecisionLiabilityInterpretabilityCompatibilityCapabilitiesResultsSectoral coverageGeographic coverageCoverageEase of useData scope/coverage2Methodology3 Transparency1Figure 1:Survey results of important factors when choosing a vendor(UNEP FI,2022).Giv

168、en the immense uncertainty around climate change and economic modelling,there is even more pressure for tool providers to be transparent about their coverage,meth-odologies and chosen metrics of different sectors and emissions.Methodology and approaches can be communicated by materials from vendors.

169、One example is MSCI ESG Manager that offers downloadable factsheets to explain their functions and funda-mental approaches.ISS ESG,S&P Globals TCS,and Oliver Wyman/S&P Global provide their users with comprehensive methodology documents,allowing banks to work through the modelling assumptions they ma

170、ke and interpret the output with greater understandingandconfidence.UserswhoaccessBlackRocksAladdinClimateviatheintegrated platform have access to comprehensive education materials covering both methodology and metrics via tear sheets,whitepapers,and deep dive videos.Moodys Climate Solutions provide

171、s its clients access to over one thousand pages of methodol-ogy and validation documentation on climate risk data and analytics.By enhancing transparency among the climate analytical solutions,the credibility of the solutions is likely to increase.At the same time,tool provides face the challenge in

172、 todays increasingly competitive environment of protecting their intellectual property.Onepotentialwaytoaddresstheseconflictingdemandsistouseathird-partyforvalida-tion.This can boost the trust in the tool without the risk of commercially sensitive infor-mation being compromised.To improve transparen

173、cy,companies could also choose to disclose information in standardised reports,such as those submitted in line with TCFD recommendations(MSCI,2022).The 2023 Climate Risk Landscape 26Contents|An overview of updates to the market for climate risk assessmenttoolsData availabilityAnother notable trend i

174、s the gradual improvement in the clarity with which Scope 3 emis-sions are estimated.For instance,many providers now account for all three emission Scopes in their methodologies;examples here include MSCI ESG Research,ICE,ISS ESG,Oliver Wyman/S&P Global and Planetrics.In part,this extra clarity is t

175、he result of requests from FIs for greater transparency on the topic.One tool provider to respond isCarbone4,whichannouncedinNovember2021thatitwouldintroduceasimplified,bottom-up approach to calculate Scope 3 emissions through sectoral statistical ratios.The market trend of transparency thus facilit

176、ates exchanges between peer tool providers and,even more importantly,it supports the cultivation of domain knowledge for FIs.The accumulated knowledge is further enhanced by increased data availability and open-source approaches provided by international organisations,research institutions,and priva

177、te-sector vendors.For example,the IEA has established a Policies and Measures Database in order to bring together information about past,existing,and planned govern-ment policies and measures relating to climate change.These government actions mightbegearedtowardsreducingGHGemissions,improvingenergy

178、efficiency,support-ing the development and deployment of renewables and other clean energy technologies,or other climate-related goals.IEA also provides free datasets regarding sub-sectors in the energy industry.The NGFS,meanwhile,provides data and technical resources corresponding to its scenarios.

179、Likewise,the International Monetary Fund(IMF)supplies downloadable metadata on its climate change dashboardsforallindicators,fromfinan-cial risk to government policy and economic activity.As for the World Bank,it provides global data on historical and future climate,vulnerabilities,and impacts throu

180、gh its Climate Change Knowledge Portal.The 2 Investing Initiative has delivered a series of software and web-based,open-source climate analytic solutions,including PACTA SaaS,PACTA for Banks,PACTA for Investors,and PACTA for Authorities.These tools have been co-developed by a dozen researchers since

181、 2012,with input from research partners and FIs.Users can access them free of charge(2DII,2022).PACTA is now under RMIs stewardship.Another example of data transparency is the Climate Risk Toolbox created by the Food and Agriculture Organiza-tion of the United Nations(FAO).The web-based toolbox aims

182、 to support the FAOs over-all aim of accelerating agricultural transformation and sustainable rural development.It does so by providing users with the means to conduct climate risk screenings based on advanced climate-related geospatial data(FAO,2022).2.4 Development of user-friendly and purpose-bui

183、lt tools to meet disclosure needsThere are several ways that tools express their output metrics.The 2021 Landscape Reportcategorisedthemasquantitative,semi-quantitative,financial,non-financial,andrepresentative of temperature alignment.Building off the last report,most providers use eitherquantitati

184、veorfinancialmetricstorepresenttheirriskassessments.Examplesinclude assets linked to climate risks,GHG emissions quantities,probability of default(PD)or loss,expected loss given default(LGD),and value-at-risk.It has been observed The 2023 Climate Risk Landscape 27Contents|An overview of updates to t

185、he market for climate risk assessmenttoolsthat banks consider metrics such as PD and LGD to be pertinent for decision-making processes,as these are essential to conduct supervisory pilot scenario analyses and stress tests.These metrics are often required for such exercises and are deemed to be core

186、estimates by supervisory authorities.According to Climate Credit Analytics methodology,it is easier to understand metrics if they are expressed as changes to financialstatementsratherthanstand-alone“climatescores”.However,thisdoesnotmean these qualitative climate scores should not be included as out

187、put metrics.For example,there is merit in providing temperature alignment or climate narrative metrics inadditiontoquantitativeorfinancialvalues.Sincelastyearslandscapereport,PwCand Ortec Finances ClimateMAPS have introduced dashboard features that explain the climate transition risk that a portfoli

188、o has accumulated in written words.ClimateMAPS includes policy and transition metrics,as well as slow-onset and extreme weather per hazard narratives and heat maps.Additionally,there are qualitative narratives for risks thatarecurrentlydifficulttoquantify,suchastippingpoints.PlanetricshasupdateditsP

189、lanetViewplatformtoincludeinformationboxesthatprovidecontextanddefinitionsforoutputs to aid interpretation.During UNEP FIs 20212022 exercise,FIs piloted climate risk tools,assessing both physical,and transition risk,and provided feedback on the form of the outputs generated.They believed it would be

190、 especially helpful to include qualitative features to support the interpretation of results.One such feature could be awrittenexplanationofthesumofexpectedfinanciallossduetoclimatechangeperhazard and per asset.PwC has recently introduced a heatmap feature,aimed at facilitat-ing the visualisation of

191、 metrics impacts on a global map of a banks assets(PwC,2020).Additionally,MSCI ESG Research provides access to a platform known as Climate Lab Company that enables banks to delve into individual issuers and examine their Asset Locations and Hazard Maps.Exceptions exist.The Frankfurt-based tool provi

192、der,right.based on science,for example,doesnotuseacombinationofqualitative,quantitative,andfinancialmetrics.Instead,itexpresses all metrics in degrees Celsius,believing that this measure helps close the gap betweenabstractclimatechangeimpactandfinancialactorsperceptionofhowtheycan contribute to reac

193、hing net zero.Usability,interactivity,and improved visualisation through geospatial mapping can be a way for tool providers to produce more digestible output alongside quantitative data.Mapping a portfolio of assets is particularly useful when determining physical risks and individual hazards on ind

194、ividual investments.An example is Munich Re and XDI,who use this feature to map physical locations to their exact coordinates.Within Munich Res offering,afirmcanoverlayclimatehazards(e.g.floodrisk)acrossmultipletemperaturescenariosupto2100onaspecificasset.Intuitivecolourscalingisincludedineachcate-g

195、ory.Visualisation in a user-friendly manner can assist with interpreting results beyond theexportablescoresandfinancialimpactsseeninanExcelspreadsheet.Thefinancialindustryhasbeenadvocatingfortheadoptionofmetricsrelatedtotransi-tion and physical risk assessments to facilitate the provision of meaning

196、ful disclosures.In recent times,several providers have developed tools that align with disclosure require-ments,includingBlackRocksAladdinClimate.Thistoolpresentsitsfindingsintheformof a platform-based interface and data sets that can be further analysed or tailored to incorporate additional data or

197、 alternative economic assumptions.This versatility enables The 2023 Climate Risk Landscape 28Contents|An overview of updates to the market for climate risk assessmenttoolsbankstoengagewiththedataatadeeperlevelandrefinetheirunderstandingofthetransition risk that they may face.Other tool vendors creat

198、e disclosure reports for their users.MSCI,McKinseys Planetrics,Oliver Wyman/S&P Global,and ISS ESG have auto-mated exportable features that can easily facilitate comparisons.For PwC,the export function is available for the transition real estate.ICE,a relatively new tool provider and one more heavil

199、y focused on climate stress testing,generates TCFD compliance reports for its users.Although downloadable reports and summary metrics may not have the same detail as the asset-by-asset assessments that underpin them,they can be valuable fordecisionmakerstounderstandafirmsoverallclimaterisks.While th

200、ese different combinations of metric types and automated report features are important to banks,there still seems to be an interpretation gap.According to a survey conducted in 2022 by UNEP FIs Tools Demo working group,two of the biggest chal-lenges that FIs face when using a tool are the interpreta

201、tion of outputs and the under-standingofthemethodologiesusedinthetools.Thesefirmsarelookingformorethanthe existing features to help them understand the risk in their portfolios,and providers must evolve their offerings to meet these demands.In addition,as a reiteration of a point made in Section 3.3

202、,there is a continuous need for tool providers to be transparent about the metrics and reports they deliver and how they estimate them.Methodological documents may need to be considered as an additional part of tool outputs to facilitate strong risk interpretations.What are the biggest challenges yo

203、u are facing within that process besides data availability and modeling certainty?Handling big data setsUnderstanding of toolsEnd to end useStability2Scalability of use3Model validationInterpretation of outputs1Figure 2:Survey results of challenges FIs are facing with vendors outputs(UNEP FI,2022).S

204、ECTION 3:Overview of transition riskapproachesThe 2023 Climate Risk Landscape 30Contents|Overview of transition riskapproaches3.1 Introduction to transition risk assessmentsTransition risk assessments can require access to detailed inferences about the devel-opment and deployment of future technolog

205、y,a considerable amount of emissions data,a wide range of climate and macroeconomic models,and an understanding of forward-looking climate and economic assumptions.Almost all methodologies use climate hazards and forward-looking carbon policy and technology variables as inputs to measure the risk to

206、 clients on their operations and value chains,with results often expressedinfinancialmetrics.Thissectionprovidesanoverviewofcurrenttransitionrisk methodologies that commercial service providers have developed.This report compares various methodologies in the transition risk assessment space.However,

207、for those looking to explore more detailed comparisons of methodological features,we suggest referring to the rigorous assessment of selected transition risk methodologies conducted by the Swiss Federal Institute of Technology(Bingler,Cole-santi Senni and Monnin,2020).Other additional resources incl

208、ude a recent article from the IEA(IEA,2021)and a technical documentation from the NGFS(NGFS,2021),as well as an academic paper by Bingler et al.that focuses on how risk assessment methodol-ogies could be enhanced(Bingler,Colesanti Senni,2020).Inthelinkbelow,readerscanfindanexcelsummaryofseveralservi

209、ceprovidersandtheir transition risk assessment tools and analytics.The information incorporated in this overview has been obtained from publicly available sources,survey responses,or contributions from most climate assessment service providers,following the assess-ment framework developed by the 202

210、1 Landscape Report.The set of service providers listed and reviewed in this section is certainly not exhaustive,but we have attempted to include the principal commercially available methodologies.Click here to access the transition risk assessment tools and analytics service providersThe 2023 Climat

211、e Risk Landscape 31Contents|Overview of transition riskapproaches3.2 Climate Transition ScenariosTransition scenarios form the basis of tool providers core assumptions when evalu-atingfinancialrisksfromclimatechange,andtheyarebuiltaroundaglobaltemper-ature target or emissions pathway.Despite the gro

212、wing universe of scenarios,there are four common storylines or pathways that most models follow:(i)ambitious Paris Agreement-aligned action;(ii)delayed Paris Agreement-aligned action;(iii)current policy commitments;and(iv)business as usual(WBCSD,2022).For example,the six NGFS scenarios can be transl

213、ated to these four categories.Orderly net-zero 2050,Below 2C,and Divergent Net Zero correspond with ambitious Paris Agreement-aligned action,as they all include immediate action with below 2C warming targets,considering both an orderly and disorderly transition.The Delayed Transition scenario is Par

214、is Agree-ment-aligned in ambition as it has a 1.6C target,yet policies and technology changes are slower,hence it is comparable to delayed Paris Agreement-aligned action.Current Policies are represented under the Nationally Determined Contributions(NDCs)scenario,and business as usual correlates with

215、 the Current Policies scenario.Many transition scenarios make use of complex Integrated Assessment Models(IAMs),whichanswer“whatif”questionsandprovide“insights,notnumbers”intodifferentmitigation options.As the NGFS points out in its key messages,the scenarios are not forecasts.The purpose of its sce

216、narios is to explore future risks and prepare for their potentialshockstothefinancialsystem,includingplausible(thoughnotalwaysprobableor desired)futures(NGFS,2022).Understanding IAM assumptions is crucial to inter-preting the complexity and interactions of each pathway(UNEP FI,2021).The primary assu

217、mptions of these models include gross domestic product(GDP),population growth rates,and global carbon pricing;secondary assumptions may comprise shadow carbon pricing that includes the social cost of carbon,shifts in consumer behaviour,improve-mentsinenergyefficiency,increasedproductivity,technicalp

218、rogresssuchasCCS,andrenewable energy development and deployment(NGFS,2022).Numerous institutions have developed transition scenario models in recent years.However,many tool providers use a sub-set of models from the IPCC,IEA,the NGFS,IPR,the International Renewable Energy Agency(IRENA),and the One E

219、arth Climate Model(OECM).A summary table of these scenarios can be found in Appendix A,including outlines of their representative pathways,their associated temperature increases,and the basis of their development.In partnership with Vivid Economics,the World Business Council for Sustainable Developm

220、ent(WBCSD)has also developed a catalogue of well-known transition models and bespoke approaches accessible through an interactive online tool.For the scope of this updated report,we summarise three key models for transition risk analysis:the IPCC,IEA,and the NGFS.The 2023 Climate Risk Landscape 32Co

221、ntents|Overview of transition riskapproachesInternational Panel on Climate Change(IPCC)The IPCCs Sixth Assessment Cycle has incorporated enhanced climate models from the Coupled Model Intercomparison Project(CMIP-6-project),allowing the IPCC to take outputs from multiple IAMs and average the results

222、 to reduce uncertainty(WBCSD,2022).The WGIIIs contribution in 2022 can be categorised by four headline conclusions that form the basis of the assumptions determining transition risk across the IPCC scenarios:A strengthened global response in the form of better designed governance,regulation,and econ

223、omic instruments will remove barriers to mitigation in the near termLinking mitigation and adaptation is crucial for sustainable developmentA transition to global net zero by 2050 will require an all-encompassing system transformation to be accomplished with a portfolio approach spanning mitigation

224、technologies,energy efficiency,retrofitting,CDR,and demand-side measuresGHG emissions have risen globally,yet the unit costs and policies enabling low-emissions technology have dramatically accelerated deployment since AR5s release in 2014International Energy Agency(IEA)The IEAs annual World Energy

225、Outlook(WEO)provides cutting edge research into global trends in energy demand and supply and their implications for energy security,environ-mental protection,and economic development.It creates detailed projections through its Global Energy and Climate(GEC)Model,which gathers over 20 years of model

226、ling capa-bilities and is designed to replicate the entire energy system(IEA 2022).The assump-tions underlying the transition risk scenarios from this years WEO can be summarised as follows:No new investments in unabated coal power plants and mines are to be made after 2030 to reach net zero by 2050

227、,and global demand for coal falls in all scenarios,though more quickly in advanced economies.Despite underinvestment,enabling policies can rapidly increase renewable technology investments that can put a peak-fossil fuel timeline into view.Investments in clean energy are still well below the require

228、ments for net zero by 2050.Global energy demand will increase significantly in all scenarios,with a majority coming from emerging and developing markets.The 2023 Climate Risk Landscape 33Contents|Overview of transition riskapproachesNetwork for Greening the Financial System(NGFS)The NGFSs scenarios

229、are a starting point for analysing climate risks in the economy withspecialconsiderationforthefinancialsystem.Thescenariosaimtopreparethefinancialsectorforfutureshocksandrisksassociatedwithclimatechange.Themodelassumptions across scenarios have been updated in its third iteration in 2022,with three

230、keyconclusionsdirectlyinfluencingtransitionriskbelow(NGFS,2022):The net-zero transition will require massive investments in green electricity and stor-age.Coal will also be wound down to nearly zero in 2050,and renewables and biomass will deliver about two-thirds of global energy needs.The scenarios

231、 assume low to medium availability of CDR technologies but vary across differing cost assumptions,countries,and availability of CDR options.A higher carbon price is needed to achieve a net-zero transition by 2050,as seen by inclusion of a shadow carbon price.The shadow price accounts for policy inte

232、nsity and changes in technology and consumer preferences.Updates from other institutionsOECM 2.0 was commissioned by the United Nations Net-Zero Asset Owner Alliance(NZAOA)in August 2022 with the goal of developing science-based sectoral decarbon-isation pathways and targets for 12 major industries.

233、OECM 2.0 improves upon OECM 1.0 by merging three independent models into one connected MATLAB-based energy assessment model covering the entire global energy system.It also enhances the model by incorporating energy demand and supply scenarios for each sector using individu-alisedGDPprojections,mark

234、etforecasts,andmaterialflowswhilecoveringScope1,2,and3emissions.Inthefuture,OECMwillbeapartofagrowingscientificefforttodevelop a transition pathway that achieves a 100%renewable energy future,also known as 100RE modelling.The main conclusions from recent studies are that 100%renewable is feasible wo

235、rldwide at low cost(Scott,2022).The IPR recently developed Quarterly Forecast Trackers(QFTs)in November 2022 to assess policy,technology,and land use developments.Along with this,QFTs measure the speed of policy ambition against their 2021 IPR scenarios of IPR 1.8C Forecast Policy Scenario(FPS),and

236、the 1.5C Required Policy Scenario(RPS).QFTs also provide in-depth detail of accelerations in energy,land-related,and technology developments via policy gap,heatmap,and 10-point scale analysis(PRI,2022).In January 2023,IPR announcedthefirstintegratednatureandclimateIPRForecastPolicyScenario+Nature(FP

237、S+Nature).Thismeetstheneedforaforward-lookingviewofhowpolicytrendsrelate to protected areas,land restoration,nature markets,climate drivers,as well as how technology and social trends impact land use and energy-related value drivers.FPS+Natureisseenasabetaversionforfuturenature-relatedscenarios(IPR,

238、2023).IRENA provides transition modelling of the energy system with a focus on renewables.Through its 2022 World Energy Transitions Outlook,it also models the scaling-up of electrificationandenergyefficiencymeasuresthatareenabledbyrenewables,hydrogen,andsustainablebiomass,alongwithlast-mileuseofCCSa

239、llofwhichitidentifiesaskey drivers to maintain a 1.5C pathway.The Outlook presents an analysis of the actions The 2023 Climate Risk Landscape 34Contents|Overview of transition riskapproachesrequired by 2030 to achieve the 1.5C pathway in 2050,as recommended by the IPCC.Inlinewithotherfindingsalready

240、mentioned,progresstowardsthesegoalswillrequirewell-targeted investments into renewables with a portfolio mix of technologies.These investments must be enabled by policy packages to incentivise fossil-fuel phasedown and encourage society-wide behaviour change(IRENA,2022).3.3 Transition risksTransitio

241、n risks are related to the adjustment process toward a low-carbon economy.Thedriversoftheserisksaregenerallyglobal,eventhoughthespecificnatureofthesedrivers will vary in different national economic contexts.The list below covers the differ-ent risks,including the description of possible developments

242、 to measure the climate-re-lated changes that could generate,increase,or reduce transition risks.These transition risks,once realised,could result in stranded assets,loss of markets,reduced returns oninvestment,andfinancialpenalties.However,ifproperlyanticipatedandeffectivelymanaged,these challenges

243、 can also present opportunities for improvement and may result in superior performance compared to peers who are less prepared.Table 2:Transition risks and indicatorsTransition risksRisk driversPolicy and Legal Increased pricing of GHG emissions,carbon footprint Scope 13 Enhanced emissions-reporting

244、 obligations Mandates on and regulation of existing products and services Exposure to litigationTechnology Substitution of existing products and services with lower-emission options(within lifetime=stranding assets;after lifetime=replacement investment)Unsuccessful investment in new technologies Str

245、anding new investments Upfront costs to transition to lower-emission technologies Higher operating costs from high-emission technologiesMarkets Changing customer behaviour Shift in consumer preferences Uncertainty in market signals Increased cost of raw materials Shiftinfinancialandbalance-sheetasse

246、tvalues Failure to capture new market opportunities and technologies via clean technology research and development and clean technology export activitiesReputation Stigmatisation of sector Increased stakeholder concern or negative stakeholder feedback Brown Share Assessment3.4 Risk assessment method

247、ologiesCompared to the 2021 Landscape Report,little has been updated within the method-ologys areas.However,the essential topics are summarised in the upcoming section.Methodologies for the forward-looking analysis of transition risks must incorporate a range of variables and estimates that affect t

248、he economic impact at the macroeconomic orsectorallevel,whichthentranslatetothefirmlevel.Finally,theymustenablethelong-The 2023 Climate Risk Landscape 35Contents|Overview of transition riskapproachestermfinancialimpactonanFItobeestimated.Generally,therearetwodifferentdatasets:(i)backward-looking sta

249、tus quo data such as GHG emissions;and(ii)forward-look-ing parameters.The combination of these data points,especially the forward-looking piece,can be used in different metrics and use cases.DataBackward-looking status quoForward-looking scenario analysisMetricsRiskImpactAlignmentTargetUse casesAnal

250、ysisAssessmentStrategySettingPerspectivesOutside-inInside-outDouble materialityFigure 3:Transition metrics landscape(Julia Bingler,for UNEP FI,2023)All categories relate to the viewpoint of chosen perspective:i.e.,outside-in,inside-out,or double materiality considerations.None of them are mutually e

251、xclusive,as an FI can use an alignment strategy to make a gap analysis that allows it to assess the risks.Figure 4 below gives an overview of how the data sets and metrics can be used through a bottom-upstructuretogeneratefinancialimpactresults.Most of the tools specialised in transition risk assess

252、ment use a general analysis structuretogenerateaclimate-adjustedfinancialriskindicatorasoneofthecommonoutputs.Theflowstartswithselectingatemperaturelimitthattheorganisationwantstoconsiderunderaspecificscenarioanalysisapproach.Inthenextstep,therearethesocio-economic assumptions that the analyst needs

253、 to identify to translate temperature limits into society development parameters,such as technology development assump-tions.The user feeds those assumptions into a climate model that the IEA and simi-larexpertinstitutionsprovide.Thesethreeinputfactorscompriseaspecifictransitionscenarionamely:(i)the

254、 temperature limits,(ii)the socio-economic assumptions,and(iii)the climate transition model.An illustrative transition scenario example is the IEAs Beyond 2-degree Scenario(B2DS).This scenario sets a rapid decarbonisation pathway in line with international policy goals.Forthefirsttime,theB2DSlooksat

255、howfarcleanenergytechnologiescouldgoif pushed to their practical limits,in line with countries more ambitious alignment goals with the Paris Agreement.Another generated output could be a normative IEA scenario that shows a pathway for the global energy sector to achieve net-zero CO2 emissions by 205

256、0,with advanced economies reaching net-zero emissions in advance of others.This scenario also meets key energy-related objectives of the United Nations Sustaina-ble Development Goals(SDGs),particularly those relating to the achievement of univer-salenergyaccessby2030andsignificantimprovementsinairqu

257、ality.Anotheroutputexample is the REMIND-MAgPIE model output from the NGFS.This optimisation model integrates macroeconomic agriculture,land use,energy,water,and climate systems(see Appendix C).The 2023 Climate Risk Landscape 36Contents|Overview of transition riskapproachesTop-down vs.bottom-up stru

258、ctureThese model outputs are then put into an economic model with either top-down or bottom-up designs,or a combination of both.Top-down design directly models economic impacts at the macroeconomic or sector level,where the end user would receivethechangeinGDPordemandinspecificproductcategories.Bott

259、om-updesign,incontrast,buildstheeconomicimpactsupfromthefirmlevel.Thisfollowsatechnol-ogy model where the result is expressed as the technology investment that is required toreachaspecifictemperaturelimit.Bottom-up methodologies provide more granular assessment with arguably more accurate near-term

260、results.The reason for this is that bottom-up approaches consider theeffectsofclimatechangeintherecentpast,typicallybasedonrecallandspecificaspectsofhuman-environmentsystems.Thiscanincludeinformationaboutspecifichuman practices and their impacts,as well as the feedback loops and complex interac-tion

261、s that have occurred between human activities and the environment.This approach providesmoredetailedinformationatthefirmlevelandthroughoutthesupplychain.Such approaches include BlackRocks Aladdin Climate,Carbone 4s Climate Impact,ICEs Element6,XDIs Cross Dependency Initiative,WTWs Climate Transition

262、 Value at Risk,PwCs Climate Excellence Tool,Oliver Wyman/S&P Globals Climate Credit Analytics,Planetrics,Verisks Transition Risk Tool,and Moodys Investors Services(MIS)Carbon Transition Assessment and Carbon&Energy Transition metrics.Top-down approaches measure emissions against the global carbon bu

263、dget.The argu-ment in favour of this approach is that country-level emissions data are often more reliableandconsistentthanfirm-levelemissionsdata.Countryestimatesarelikelytobemorethoroughlyverifiedthanemissionsfromanyindividualfirm.Additionally,top-downapproaches more readily capture the networked

264、effects of interacting climate risk driv-ers,including policy,technology,and physical risk.Ortec Finances ClimateMAPS and Entelligents SmartClimate Technologies are examples of top-down approaches.Other providers,such as MSCI,employ a hybrid methodology that integrates both top-down and bottom-up ap

265、proaches to assess the risks posed by future policies aimed at addressing climate change.ISS ESG has hybrid approach capabilities,but it largely relies on a top-down approach derived from regional and country-level assumptions about the carbon price.These prices translate to higher emissions costs i

266、n the form of increased company-level operating expenditures(OPEX).The 2023 Climate Risk Landscape 37Contents|Overview of transition riskapproachesIndustry&Market dataS&P Global Market IntelligenceS&P Global TrucostCompany financialsCompany financialsPriceVolumeUnit costCapital expenditureAsset valu

267、eClimate ScenariosCompany-level Financial Statements(Scenario-adjusted)Income statementBalance sheetCashflowstatementCredit Analytics ModelsCreditModelTM,probabilty of default fundamentals modelScenario-adjusted Credit score and PDFirst,we identify and assess key drivers to translate the impact of a

268、 secnario on a companys financialstatementsSecond,we develop scenario-adjusted financial statements based on key driversLastly,we create a linkage between scoring model metrics and the scenario-adjusted financialstatementsandre-runmodel.InputIntermediary outputOutputFigure 4:Bottom-up module sample(

269、Oliver Wyman/S&P Global,2020).In the next phase,model outputs expressed as the change in GDP or technology invest-mentsarecombinedwithfirm-leveleconomicclimateriskindicators;e.g.emissions-in-tensive revenues or low-emissions capital expenditure(CAPEX).There are two options foranalysis:amicroeconomic

270、modelorafirm-levelanalysisofthemodeloutput.Amongotherdeliverables,bothoptionswillleadtoanoutputthatdescribesafirmsriskprofilein terms of revenues and costs changes.The analysis structure could stop there.However,as most FIs are interested in integrat-ingthoseresultsintotheirinternalprocessestoinflue

271、ncetheircreditriskprocesses,theymustincorporatethemodeloutputsintotheirfinancialmodelling.Dependingontheirlevel of analysis,FIs may calculate the climate value-at-risk(cVaR)or the climate-ad-justed probability of default(PD).Generally,climate risks can be transferred through differentmicroormacrotra

272、nsmissionchannelstofinancialrisks.Asanexample,tran-sitionriskswillaffectbusinessesprofitabilityandhouseholdswealth,whichwillcreatefinancialrisksforlendersandinvestors.Withthat,thoseriskscanleadtoashockinthebroader economy through investment challenges and effects on productivity.They can also pose a

273、 massive threat when the transition leads to stranded assets.Further,there are the effects of acute and chronic physical risks to consider.Acute impacts result from extreme weather events that can lead to business disruptions and damage to properties.These events can increase underwriting risks for

274、insurers,leading to lower insurance coverage in some regions and impairing asset values.The second area of physical risks are chronic impacts,particularly from increased temperatures,sea levels rise,and precipitation that may affect labour,capital,land,and natural capital in specificareas.Thesechang

275、eswillrequiresignificantinvestmentandadaptationfromcompanies,households,and governments.An important consideration is the possible The 2023 Climate Risk Landscape 38Contents|Overview of transition riskapproachesclimate-economy feedback cycle,which means that climate risks can have economic impacts a

276、nd that,likewise,economic impacts can create climate impacts.Usingclimatescenariosandassociatedsocioeconomicpathwaystodeterminefinancialriskatthesectorandfirmleveldependsontheapproachthemethodologytakes.Themethodology must enable the assessment of a range of variables and assumptions that affect the

277、 economic impact at the macroeconomic or sectoral level.Then,it must facili-tatethetranslationofthoseimpactsatthefirm-levelandsubsequentlygenerateanesti-mationofthefinancialimpacttotheFIinquestion.Thisreportbasesitsmethodologicalassessment on the framework developed in the Changing Course report,whi

278、ch looks at each methodologys scope and breadth of assessment.The scope of an assessment is across four principal impact channels:Macro-environment:Economic trends at the macro-level tend to be the starting point for top-down analyses.Policy and technology changes at the country and sector level cou

279、ld impact macroeconomic indicators,such as economic growth,the balance of trade,and exchange rates(particularly in the case of disorderly transitions or price shocks).Supply chain:Policy or technology shifts could see impacts on the upstream or downstream supply chain of counterparties;for example,t

280、hrough chang-ing costs of electricity generation or increased demand for certain products such as electric vehicles.Operations and assets:This impact channel directly affects the operations of counterparties;i.e.Scope 1 emissions.Market:For emissions-intensive industries,most transition impact will

281、be through the Scope 3 emissions of consumers;so,for coal mining or oil&gas production,policy or technology changes will lead to changes in market demand.SECTION 4:Overview of physical riskapproachesThe 2023 Climate Risk Landscape 40Contents|Overview of physical riskapproaches4.1 Introduction to phy

282、sical risk assessmentsThis section provides an overview of the latest physical risk methodologies and builds on the structure of the original 2021 Landscape Report.The aim of the updated version of the work in this report is primarily to accomplish completeness and to list new vendors with their off

283、erings and coverage.Many FIs will continue to assess their transition and physical risk exposure.In response to this industry need,vendors can be expected to provide more robust and detailed integrated risk assessment solutions.As with the transition risk overview in Chapter 3,the hyperlink below ta

284、kes readers to an excel overview of multiple physical risk tools.The set of service providers listed and reviewed in this section is undoubtedly incomplete.However,we have attempted to include the principal commercially available methodologies.We also let participants choose which providers they wan

285、t to have the detailed analysis of this year.For a detailed overview of the survey methodology and a set of case studies by banks using a selection of methods,please refer to the Charting a New Climate report.Beneath are a few additions to the commentary provided in the previous 2021 Landscape Repor

286、t.Click here to access the physical risk assessment tools and analytics service providersThe 2023 Climate Risk Landscape 41Contents|Overview of physical riskapproaches4.2 Physical risk scenariosThe IPCC,a United Nations body that reports on the state of climate research and is convened by UNEP and t

287、he World Meteorological Organization(WMO),established the Representative Concentration Pathway(RCP)scenarios for atmospheric GHG concen-trations.These effectively measure the amount of warming that could occur by the end of this century.The RCPs are labelled after a possible range of radiative forci

288、ng values in the year 2100(values commonly used include:2.6,4.5,6.0,and 8.5 Watts per square metre)(IPCC AR5,2014).Radiative forcing(RF)is a measure of the extra energy in the climatesystem,wheretheRFofagasisdefinedasthedifferencebetweenincomingsolar radiation and outgoing infrared radiation caused

289、by the increased concentration of that gas.Scientists use these values to estimate potential temperature rises and subtracttheenergyflowingoutfromtheenergyflowingin.Ifthenumberispositive(“positiveforcing”),thereisawarming.Ifthenumberisnegative(“negativeforcing”),then there is cooling.Although RCP sc

290、enarios also apply to the transition side,they are more commonly used for physical risk assessment since different RCPs are converted into relevant potential temperatures.Figure 5 below elaborates on the four pathways developed by IPCC,which describe different climate futures that span a broad range

291、 of forcing in 2100.CO2 Emissions(GtC)RCP2.6RCP4.5RCP6RCP8.535302520040206020802100Figure 5:Emissions of carbon dioxide across the RCPs(van Vuuren et.al.,2011).The 2023 Climate Risk Landscape 42Contents|Overview of physical riskapproachesRCP 2.6A strong mitigation scenario leading t

292、o a warming typically aligned to 95th p)Wet days(10mm)Disruption of services,health impacts such as famine and disease,and tertiary effects could change the position of river channels,leading to landslides.Wildfire risk Change in days with high wild-firepotential Changeinmaximumwildfirepotential Day

293、swithhighwildfirepotential MaximumwildfirepotentialSecondary effects,including erosion,land-slides,impaired water quality,and smoke damage,oftenaccompanyfireevents.ChronicSea level rise Absolutecoastalfloodfrequency RelativecoastalfloodexposureRising sea levels lead to multiple adverse effects like

294、coastal erosion,inundations,stormfloods,tidalwatersencroachmentintoestuaries and river systems,and contamina-tion of freshwater reserves.Heat Stress Energy demand Extreme heat days Extreme temperatureThe health impacts of rising air temperature are compounded by increased atmospheric water vapor,whi

295、ch reduces humans ability to dissipate heat.Drought Stress Meteorological drought:i.e.days per annum with precipita-tion below 1mmIncreasing temperature,in addition to changes in precipitation patterns,can cause drier weather conditions and hence more intense and frequent drought events,which can ha

296、ve severe economic,environmental,and social impacts.Precipitation Stress Current baseline water stress Current inter-annual variability Future water demand Future water supply Water demand change Water supply changeTheeffectsofadverserainincludeflooding.Heavy rainfall effects in urban areas can be e

297、specially catastrophic,endangering lives and damaging infrastructure.The 2023 Climate Risk Landscape 46Contents|Overview of physical riskapproaches4.4 Assessment methodologyPhysical risks can be assessed across multiple dimensions:hazards,exposure,and vulnerability.Hazards refer to the probability o

298、f dangerous climate change events,which may be acute or chronic.Physical climate risk assessment requires informa-tion on these factors for each company or security issuer.Based on the literature,the term“physicalrisk”canbeconceptualisedwiththefollowingequation:Risk=Hazard x Vulnerability x Exposure

299、.As mentioned previously,hazards are potentially damaging physical events,phenomena,or human activities that may cause environmental degra-dation,harm human health,cause social or economic disruption,or precipitate property damage or loss of land.As the second attribute,exposure refers to each asset

300、s risk in theseclimateevents.TheIPCCdefinesitas“thenatureanddegreetowhichasystemisexposedtosignificantclimatevariations”(IPCC,2020),such as the presence of people,species,economic or social activities(including public services),and physical assets,(e.g.buildings,infrastructure),oranyotherdefinedvari

301、ationexposedtohazardsinaspecificarea.Finally,vulnerabilityisthesusceptibilitytothehazardregardingphysical,societal,and economic factors,which include actions taken to reduce or adapt to the hazard.SPM3ASSESSING AND MANAGING THE RISKS OF CLIMATE CHANGEHuman interference with the climate system is occ

302、urring,1and climate change poses risks for human and natural systems(Figure SPM.1).Theassessment of impacts,adaptation,and vulnerability in the Working Group II contribution to the IPCCs Fifth Assessment Report(WGII AR5)evaluates how patterns of risks and potential benefits are shifting due to clima

303、te change.It considers how impacts and risks related to climatechange can be reduced and managed through adaptation and mitigation.The report assesses needs,options,opportunities,constraints,resilience,limits,and other aspects associated with adaptation.Climate change involves complex interactions a

304、nd changing likelihoods of diverse impacts.A focus on risk,which is new in this report,supportsdecision making in the context of climate change and complements other elements of the report.People and societies may perceive or rankrisks and potential benefits differently,given diverse values and goal

305、s.Compared to past WGII reports,the WGII AR5 assesses a substantially larger knowledge base of relevant scientific,technical,and socioeconomicliterature.Increased literature has facilitated comprehensive assessment across a broader set of topics and sectors,with expanded coverage ofhuman systems,ada

306、ptation,and the ocean.See Background Box SPM.1.2Section A of this summary characterizes observed impacts,vulnerability and exposure,and adaptive responses to date.Section B examines futurerisks and potential benefits.Section C considers principles for effective adaptation and the broader interaction

307、s among adaptation,mitigation,EMISSIONS and Land-use ChangeVulnerabilityExposureRISKHazardsAnthropogenic Climate ChangeSocioeconomic PathwaysAdaptation and Mitigation ActionsGovernanceIMPACTSNatural VariabilitySOCIOECONOMICPROCESSESCLIMATERFigure SPM.1|Illustration of the core concepts of the WGII A

308、R5.Risk of climate-related impacts results from the interaction of climate-related hazards(including hazardous events and trends)with the vulnerability and exposure of human and natural systems.Changes in both the climate system(left)and socioeconomic processes including adaptation and mitigation(ri

309、ght)are drivers of hazards,exposure,and vulnerability.19.2,Figure 19-1Summary for Policymakers1A key finding of the WGI AR5 is,“It is extremely likely that human influence has been the dominant cause of the observed warming since the mid-20th century.”WGI AR5 SPM Section D.3,2.2,6.3,10.3-6,10.921.1,

310、Figure 1-1Figure 7:The IPCC AR5 conceptual framework with risk at the centre(IPCC,2014).The equation mentioned above is not only conceptual;each parameter can also be quan-tifiedusingspatialdata.Forexample,exposurecanbeillustratedbythenumberofbuild-ings,theeconomicvalue,orthenumberofpeopleimpacted.T

311、hosenumbersdefinehowthe risk is displayed.With this,Figure 7 demonstrates the coherence and shows the IPCC AR5 conceptual framework for assessing the multiple interacting risks of climate change.An updated version of this risk propeller from the WGII contribution to the AR6 The 2023 Climate Risk Lan

312、dscape 47Contents|Overview of physical riskapproachescan be found in Appendix F.The AR6 report has a stronger focus on the interdepend-enciesofclimate,ecosystems,andbiodiversitywithhumansocieties,andthisfigureisdesignedtoreflectthis.Forthescopeofthisreportandforthissectiononphysicalrisk,we are refer

313、encing the AR5 conceptual framework in Figure 7.Physicalriskshavedirectfinancialconsequencesfororganisationswherethoserisksare realised,as well as for up-front insurance and investment-related costs.How phys-ical risks change over time through the dynamic relationship of the three core compo-nents o

314、f risk(hazard,exposure,vulnerability)need to be better understood and it has yet to be dealt with in a coherent,consistent,and widespread manner.However,if one dimension of the physical risk framework increases,and if the other two are constant,then the overall risk has increased.A physical risk ass

315、essment methodology typically has multiple steps that begin with an iterativeprocessofdefiningscope,settingobjectives,andcollectingdata.Followingthis,the relevant scenario must be chosen along with the impacts to be measured.Lastly,interpretingresultstoincorporateintodecision-makingisthelastcrucials

316、tepanddefin-ingsignificantassessmentlimitations(NGFS,2022).Figure 8 below depicts this six-step process:1.Define needs and objectives2.Identify available data and resources3.Define the scope and approach4.Generate the scenarios5.Estimate the impacts6.Present&interpret the resultsFigure 8:Physical Cl

317、imate Risk Assessment Process(World Bank,2019).An elaboration of the step-by-step process for physical climate risk assessment can be found in the NGFS Physical Risk Assessment Report.Further,each data set models severaldifferentmetrics,butthemostusefulforthefinancialsectorarethosemetricsthat cover

318、balance sheet impacts and macroeconomic data focused on the most relevantimpactsofthesehazards,suchasfinanciallossesandchangesinmacroe-conomic factors(see Appendix B).Through a forward-looking assessment of acute climate shocks and their socioeconomic impacts,the proposed framework can support bette

319、r-informed decision-making for a broad range of potential applications,including managing climate-related public contingent liabilities,central banks climate stress-test-ing,andclimate-resilientfinancialproductdevelopment.The 2023 Climate Risk Landscape 48Contents|OverviewofphysicalriskapproachesIn

320、summary a physical climate risk assessment requires different types of data,for example:1.Macroeconomic dataa.National accountsb.Physical capitalc.Household consumptionsd.Informal sectore.Regional GDP/GVAf.Labour and productivityg.Tradeflowh.Government spending and revenueAt this moment,the macroeco

321、nomic data is taken from places such as the NGFS,market reports,and government databases,but these sources may also be expanded and inter-polated by tool providers.2.Asset-specific financial informationa.Capital adequacyb.Assets and liabilitiesc.Managementd.Earningse.Liquidityf.Vulnerability to risk

322、Generally,asset-level data is becoming more frequent,and more companies are disclos-ingpubliclydetaileddata,suchastheirgeolocationoffields,capacity,productivity,andownership information.In addition,frameworks such as the TCFD are voluntary recom-mendations that support the progress toward disclosure

323、 of climate-related risks and opportunities.3.Climate-related dataa.Geospatial datab.Hazard informationc.Weather detailsClimate-related information is getting more accurate and reliable in the predictions of global temperature increases as they are based on well-founded physical principles.Further,o

324、bser-vations are coming from more radars,the latest technology,and satellites that continue to enrich the climate models.Historical and forward-looking data,such as the IPCC Atlas and the Word Bank Climate Change Knowledge portal,are available as public hazard data sets.However,end-users should be a

325、ware of the limitations and uncertainties that still remain,particularly in how acute weather events may change in the future.Going forward,physical risk models will be able to aggregate greater sources of data,with theuseofgeospatialandremotesensingdata,climatemodelprojections,artificialintel-ligen

326、ce(AI),and data mining.AI will be of increasing importance in accessing data from various sources.For physical risks,this could include vision learning from geospatial data,which will also help to expand the range of physical hazards covered.One area for improvement in physical risk models is assess

327、ing the impacts from second-ary effects driven by climate change,whether socio-economic(e.g.,migration and conflict)orenvironmental(e.g.publichealthshocks).Thesesecondaryimpactsarediffi-cult to model given the human behaviour element of socio-economic shocks and the unpredictable nature of public he

328、alth impacts.However,public research funding is being directed towards modelling limited climate change-induced impact scenarios,such as theCASCADESproject.ThisEU-financedinitiativewillmodeltradeandsupplychains,analysing the impact of acute and physical climate change-related hazards on agricul-tura

329、lproduction,energy,andcommoditymarkets.Combinedwith“macro-economicmodelling,qualitative political analysis,and strategic policy simulations”,this will enable an assessment of areas of critical concern and potential solutions for Europe and beyond(CASCADES,2022).The 2023 Climate Risk Landscape 49Cont

330、ents|Overview of physical riskapproachesSECTION 5:Ways in which institutions can use climate tools5.1 Navigating climate risk:use casesThis section highlights use cases for the external employment of climate tools by FIs to prepare and confront climate change.Firms gradually recognise the importance

331、 of understanding and managing climate risks in their portfolios and operations in current and future investments,along with capital allocation.Conducting in-house assess-ments of climate risk currently requires considerable time,knowledge,and capital.As a consequence,FIs are outsourcing climate ana

332、lytic services to external companies that help them measure climate risk and provide data,models,analysis,and methodologies.These services are designed to help investors and other FIs to understand,report,and actonthefinancialrisksandopportunitiesassociatedwithclimateriskintheirportfo-lios.In additi

333、on,they offer solutions that empower the integration of ESG across invest-mentworkflowsandhelpusersreportagainstregulatoryandstakeholderrequirementsand policies.By assessing climate risks,institutions can address drivers of vulnerability in their port-folios to build adaptative capacity.As these evaluations are highly complex and lack causality compared to conventional risk assessments,using clima