Climate Risk and TCFD Programme

Scenario analysis has become a vital tool for assessing climate risks with a number of modelers having developed various scenario pathways. Our scenario analysis workstream is designed to help financial institutions better understand and use climate scenarios. Our working group focuses on: 

• Understanding the assumptions and features of climate scenarios and their underlying Integrated Assessment Models (IAMs)
• Identifying how financial institutions can best use scenarios for specific use cases 
• Driving the development of short-term scenarios 

To do so, the programme has created a platform for engagement between financial institutions, modellers and researchers. 

Climate stress testing is another key priority of the Climate Risk and TCFD programme. Our work on climate stress testing revolves around developing best practice guidance and sophisticating methodologies for climate stress testing. The programme continues to engage with supervisory authorities on their climate stress tests, including lessons learned and member feedback. 

Climate change presents a range of physical risks. Financial actors need data and approaches to help them identify and manage physical risks in order to support their own stability and that of their clients and communities. Our working group aims to: 

• Expose members to open-source data and tools for physical risk assessments
• Consider the second order and compounding effects of climate risks 
• Explore underappreciated factors such as adaptive capacity in potential financial impacts 

The programme’s physical risk work helps members heighten their understanding of physical climate risks, gain experience with climate risk data and assessment tools and improve understanding of relevant physical risk and adaptation metrics. 

With dozens of physical and transition risk tools available, this working group aims to help financial institutions understand the tools that currently exist to measure physical and transition risks.

• Participants will understand the latest landscape of climate risk tools for both physical and transition risks
• Participants will review the use cases, sectoral and geographical coverage of third-party tool providers
• Participants will compare various tools to understand their strengths and weaknesses to determine the tools best suited to their needs
• Participants will identify where key gaps and limitations exist in the current landscape of climate risk tools and how can they be addressed

This working group is currently focusing on addressing greenwashing risks. The overall aim of the group is to:

• Understand the different acts, omissions and failures that give rise to different kinds of climate-linked litigation/enforcement actions, together with the drivers for such actions.
• Understand how to identify and assess climate-related legal risks in lending and investment portfolios, covering rapidly evolving developments around methodologies and metrics in this area.
• In relation to firms’ own climate-related legal & regulatory risks: understand the key risks that arise in the context of banking and capital markets product lines and how they can be managed effectively.
• In relation to firms’ own climate entity disclosures (including target setting): understand what the key legal and regulatory risks are and how to effectively manage these.

The programme aims to further investigate the interplay between climate and nature-related financial risks in collaboration with its members, other UNEP FI initiatives and external organizations.

As financial institutions face increasing climate risks and commit to reaching net-zero by 2050, UNEP FI’s Climate Risk and TCFD Programme recognizes the importance for firms to begin integrating climate change into their underwriting practices. Key concerns by firms regarding net-zero underwriting include:

• How to study risks for underwriting
• How to assess clients under different climate scenarios
• How to incorporate climate risks into borrower ratings and pricing

In 2023, UNEP FI’s Climate Risk and TCFD Programme published a series of climate-related sector briefing notes as part of a broader series on how financial institutions can manage sector-specific climate risks. The briefs explore physical and transition risks for the sector and provide guidance on how financial institutions can engage with clients to manage risks specific sector. Identifying and assessing sector risks and opportunities is a key focus of the programme which will be looked at through various programme workstreams.