Climate Risk is becoming an integral part of the Risk Management strategy of financial institutions. The rapid climatic changes we're experiencing right now are slated to have an adverse impact on global temperature and rainfall patterns, catastrophic rise in sea levels, and knock-off effects on human capital, real estate, energy production, et al.
It is imperative that financial institutions adopt a holistic risk management view by incorporating climate risk related factors into their risk computation methodology. Towards this, the ECB (European Central Bank) conducted a Climate Risk specific Stress Testing exercise for banks in 2022. This was more of a preparatory exercise that will not impact the current capital requirements of banks. However, the results have revealed critical shortcomings and gaps that banks need to work on in the coming years for a more robust risk management framework.
The attached Solytics' whitepaper delves into the details.
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