The ongoing drought and the major economic impact this is having on European economies makes it clear that taking climate risks into account is a necessity for financial institutions. Integrating energy transition into risk analysis is already well advanced, as the impact of changing legislation and reducing fossil dependence can be estimated. These are costs that companies incur to adapt their business models to changing regulations and the transition to a carbon-neutral economy. The impact of the current drought on agriculture, inland shipping, and nuclear and hydroelectric power plants, among others, shows the urgency of integrating climate change into business risk models for all sectors.
For insurers, weighing physical risk means pricing in the increased risk of natural disasters such as wildfires and floods. For financiers and investors, it means adding scenario analyses that factor in the effect of drought and sea level rise, among other things. Banks can thus provide better advice, for example when choosing a business location. Climate scenarios provide insight into which areas are exposed to the consequences of extremely high or low water levels, what the loss of biodiversity means for the productivity of agricultural land and whether there is sufficient drinking water available in an area to maintain certain production processes during periods of drought.
Identifying the impact of climate change on classic business risks, such as credit, market and operational risks, not only enables companies to better arm themselves against the consequences. It also raises awareness about the urgency of addressing the climate impact of production processes more quickly.
Marie-Lore Aka, Head of RISK ESG at BNP Paribas: “BNP Paribas is continuously improving the methods used to analyze both climate impact and dependence on fossil energy. To do so, we use qualitative and quantitative research methods. We base ourselves on the insights that experts have into the location of clients’ assets and the extent to which a business strategy is aligned with the energy transition. In addition, predictive models are used to create simulations of the financial consequences of different climate scenarios. Data availability is a major challenge for these analyses. Stricter rules around the disclosure and unlocking of relevant climate risk data in risk management systems would help. It increases the tools available to banks to engage in dialogue and guide clients towards a sustainable economic model.”
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