Assessing Financial Risks from Physical Climate Shocks : A Framework for Scenario Generation

Climate change has become a main concern of ministries of finance, central banks, and financial regulators. In response, a suite of scenarios and tools have been developed tthe potential scale of climate risks and underprice investments in resilience. This is particularly important for emerging mark...

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Main Authors: Ranger, Nicola Ann, Mahul, Olivier, Monasterolo, Irene
Format: Report
Language:English
English
Published: Washington, DC: World Bank 2022
Subjects:
Online Access:http://documents.worldbank.org/curated/en/760481644944260441/Assessing-Financial-Risks-from-Physical-Climate-Shocks-A-Framework-for-Scenario-Generation
http://hdl.handle.net/10986/37041
id okr-10986-37041
recordtype oai_dc
spelling okr-10986-370412022-02-26T05:10:34Z Assessing Financial Risks from Physical Climate Shocks : A Framework for Scenario Generation Ranger, Nicola Ann Mahul, Olivier Monasterolo, Irene EQUITABLE GROWTH FINANCE & INSTITUTIONS FINANCIAL RISK CLIMATE SHOCK FINANCIAL SECTOR CLIMATE-RELATED FINANCIAL RISK SCENARIOS RISK MANAGEMENT RISK DRIVERS MACROPRUDENTIAL SUPERVISION MACROFINANCIAL FEEDBACK CLIMATE CHANGE Climate change has become a main concern of ministries of finance, central banks, and financial regulators. In response, a suite of scenarios and tools have been developed tthe potential scale of climate risks and underprice investments in resilience. This is particularly important for emerging markets and developing economies where exposure to physical climate risks is already high and is expected to further increase with climate change. The paper identifies five areas, or risk drivers, that make a material contribution to physical climate risks to the financial sector and that are not consistently included in current scenarios and tools: (1) extreme weather events; (2) uncertainties in climate models; (3) compound scenarios; (4) indirect economic impacts of shocks; and (5) feedback between the real economy and the financial sector. We derive a framework for generating scenarios to assess acute physical climate-related financial risks, which is inspired by the “Realistic Disaster Scenarios” that are used in risk management and supervision in the insurance sector. The framework is illustrated through an application of the EIRIN macroeconomic model. This framework aims to complement recent work by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and the Financial Stability Board (FSB) to inform ministries of finance, central banks, financial regulators, and financial institutions on climate financial risk assessments, both for micro- and macroprudential risk management, and to incorporate climate risks into wider financial decision making and disclosures.o assess the financial risks from physical climate shocks (for example, hurricanes, droughts, wildfires, flooding). However, those scenarios do not fully capture such shocks, which could lead financial institutions to underestimate. 2022-02-25T21:31:07Z 2022-02-25T21:31:07Z 2022-02-01 Report http://documents.worldbank.org/curated/en/760481644944260441/Assessing-Financial-Risks-from-Physical-Climate-Shocks-A-Framework-for-Scenario-Generation http://hdl.handle.net/10986/37041 English en Equitable Growth, Finance & Institutions Insight; Other Financial Sector Studies; CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank Washington, DC: World Bank Report Publications & Research
repository_type Digital Repository
institution_category Foreign Institution
institution Digital Repositories
building World Bank Open Knowledge Repository
collection World Bank
language English
English
topic EQUITABLE GROWTH
FINANCE & INSTITUTIONS
FINANCIAL RISK
CLIMATE SHOCK
FINANCIAL SECTOR
CLIMATE-RELATED FINANCIAL RISK SCENARIOS
RISK MANAGEMENT
RISK DRIVERS
MACROPRUDENTIAL SUPERVISION
MACROFINANCIAL FEEDBACK
CLIMATE CHANGE
spellingShingle EQUITABLE GROWTH
FINANCE & INSTITUTIONS
FINANCIAL RISK
CLIMATE SHOCK
FINANCIAL SECTOR
CLIMATE-RELATED FINANCIAL RISK SCENARIOS
RISK MANAGEMENT
RISK DRIVERS
MACROPRUDENTIAL SUPERVISION
MACROFINANCIAL FEEDBACK
CLIMATE CHANGE
Ranger, Nicola Ann
Mahul, Olivier
Monasterolo, Irene
Assessing Financial Risks from Physical Climate Shocks : A Framework for Scenario Generation
relation Equitable Growth, Finance & Institutions Insight;
description Climate change has become a main concern of ministries of finance, central banks, and financial regulators. In response, a suite of scenarios and tools have been developed tthe potential scale of climate risks and underprice investments in resilience. This is particularly important for emerging markets and developing economies where exposure to physical climate risks is already high and is expected to further increase with climate change. The paper identifies five areas, or risk drivers, that make a material contribution to physical climate risks to the financial sector and that are not consistently included in current scenarios and tools: (1) extreme weather events; (2) uncertainties in climate models; (3) compound scenarios; (4) indirect economic impacts of shocks; and (5) feedback between the real economy and the financial sector. We derive a framework for generating scenarios to assess acute physical climate-related financial risks, which is inspired by the “Realistic Disaster Scenarios” that are used in risk management and supervision in the insurance sector. The framework is illustrated through an application of the EIRIN macroeconomic model. This framework aims to complement recent work by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and the Financial Stability Board (FSB) to inform ministries of finance, central banks, financial regulators, and financial institutions on climate financial risk assessments, both for micro- and macroprudential risk management, and to incorporate climate risks into wider financial decision making and disclosures.o assess the financial risks from physical climate shocks (for example, hurricanes, droughts, wildfires, flooding). However, those scenarios do not fully capture such shocks, which could lead financial institutions to underestimate.
format Report
author Ranger, Nicola Ann
Mahul, Olivier
Monasterolo, Irene
author_facet Ranger, Nicola Ann
Mahul, Olivier
Monasterolo, Irene
author_sort Ranger, Nicola Ann
title Assessing Financial Risks from Physical Climate Shocks : A Framework for Scenario Generation
title_short Assessing Financial Risks from Physical Climate Shocks : A Framework for Scenario Generation
title_full Assessing Financial Risks from Physical Climate Shocks : A Framework for Scenario Generation
title_fullStr Assessing Financial Risks from Physical Climate Shocks : A Framework for Scenario Generation
title_full_unstemmed Assessing Financial Risks from Physical Climate Shocks : A Framework for Scenario Generation
title_sort assessing financial risks from physical climate shocks : a framework for scenario generation
publisher Washington, DC: World Bank
publishDate 2022
url http://documents.worldbank.org/curated/en/760481644944260441/Assessing-Financial-Risks-from-Physical-Climate-Shocks-A-Framework-for-Scenario-Generation
http://hdl.handle.net/10986/37041
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