Case Studies

Case Studies

Financial Institutions & Regulatory Compliance

Client Challenge/Objectives

A European bank is preparing to comply with a range of new EU regulations, including the ECB Guide on Climate and Environmental Related Risk, the Sustainable Financial Disclosure Regulation (SFDR), and the EU Taxonomy. In particular, the ECB Guide requires a significant adjustment to the bank’s governance and risk management policies. The Risk Management Framework must include a Risk Appetite Statement, set risk limits, which will then need to be monitored and reported on. Furthermore, the bank has significant exposure to carbon intensive sectors and need to update its client due diligence to incorporate climate and environmental related risks.

Our Support

Climate Risk Services offers a five-step ECB Compliance Pathway. Starting with a gap analysis to inform decision-making and setting clear objectives supports planning and prioritization. A detailed implementation plan with identification of workstreams is paired with a strategic capability assessment to identify which capabilities are available (or can be developed) in-house, and which need to be sourced elsewhere. From the start of the implementation through set milestones and objectives, Climate Risk Services offers a combination of advisory support and dedicated resources. This approach is intended to build the capacity and capability of the client’s team, enabling long-term management and continual improvement of the strategies and tools put in place.

Outcome

The client is now able to significant progress towards compliance with the ECB Guide, with clear priorities and implementation milestones. This is an important step as Guide will inform supervisory dialogue in Q1 2021, and climate risk will be included in the annual Supervisory Review and Evaluation Process.

Find out how we can support your first steps towards ECB compliance on Climate-related and Environmental risks.

Case Studies

Mining Company & Physical Risks for Climate Adaptation

Client Challenge/Objectives

A mid-sized mining company, listed on the stock exchange, operates several mines in a developing country. The mining company publishes an annual report which includes its environmental, social and governance (ESG) data. The company has an excellent record in working with local communities, providing vocational training and sourcing local goods and services where possible.

The country is exposed to multiple weather-related hazards and suffers from periodic cyclones, droughts, floods, and related epidemics. In 2015, a cyclone caused major flooding in the region, disrupting power supply and shutting down the plant for two months. The mining company subsequently worked with the local utility company to improve the reliability of the power lines. Without naming it as such, the company was now engaged in climate adaptation by working with the local utility and funding the strengthening of utility poles near major rivers.

Our Support

Not all climate risk channels are material to every company, sector, or geography. Climate Risk Services developed an ‘Impact Chains’ assessment, identifying material risk channels to the company’s operations and mapping risk channels to impacts on financial performance and operational availability.

Outcome

This work supports stepping towards the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), as well as supporting internal decision-making around financial management and operational performance. In applying our Risk/Vulnerability Matrix, we also identified a range of activities that would help the company to mitigate risks and increase resilience, lending support to informed decision-making around capital expenditures.

Find out what operational risks your asset(s) may be exposed to, and how it should inform decision-making.

Case Studies

Real Estate Investment & Strategic Decision-Making

Client Challenge/Objectives

A private equity real estate investment company with assets across the United States wanted to know the climate risks associated with investing in a hotel located on the East Coast. The asset is located in a hurricane prone area, so some risks were known but without understanding of forward-looking exposure. The investor wanted to understand the full picture of all risks, direct and indirect, and what opportunities the organization might have to mitigate these risks.

Our Support

Climate Risk Services performed a detailed climate risk assessment applying our approach that has been developed together with the Future of Real Estate initiative at Oxford University. In this approach we look at physical and transition risks on the market level (i.e. the area in which the asset is located) as well as asset-level risk such as business continuity in case of extreme weather. We found that the majority of risks were on the market level; in particular, the city in which the asset is located has ambitious (yet unfunded) plans to build a major storm surge wall. The wall would likely be paid for by a sharp increase in property taxes, pushing asset valuation down. Furthermore, the company is facing a sharp increase in insurance premiums.

Outcome

The company is currently evaluating whether to shorten the holding period of the asset, or take other mitigative actions. It has also requested additional support to perform a risk assessment across the whole portfolio to adapt its investment strategy.

Find out how this approach could support your investment strategy.

Case Studies

Asset Owner & Portfolio Risk Analysis

Client Challenge/Objectives

An asset owner with a concentrated investment portfolio needs to understand climate risks which may impact is portfolio return. The portfolio has already been screened against physical climate risks one year ago but the report yielded little “actionable intelligence”. With a small investment universe, the asset owner needs to understand how to identify climate risks with a view to engaging with portfolio companies to build awareness and resilience.

Our Support

At the portfolio level, climate risk can be assessed in sector-geography pairs across both physical and transition risk. This allows an asset owner to identify assets that are most at risk, and our scoring framework offers a consistent and standardized approach to incorporating scoring into investment risk analysis and comparison. By identifying high risk investments, or sector/geography concentrations, a more detailed climate risk due diligence can be performed. Rather than outputting a precise but inaccurate point estimate, our Baynesian network modelling tool offers a forward-looking probabilistic financial exposure curve for individual assets or companies.

Outcomes

This analysis enables an asset owner to engage with at-risk portfolio companies, identify a range of risk mitigation options, and evaluate climate-related risk concentrations in its portfolio. It also enables incorporation of climate risk scoring into portfolio analysis, through relative adjustments to key risk indicators or financial metrics.