It has been widely recognized now that climate change has the potential to adversely affect society and economies. Transition risk (i.e., the risks that arise from the transition to a low-carbon economy), is particularly untested. As a result of this, it has become one of the main topics of discussion among governments and financial regulators due to its potential to slow economic growth, reduce employment and undermine the stability of financial markets.^[1] Central banks and regulators across the world are taking steps to ensure that banks are prepared for any shocks to the financial system by having significant financial institutions stress test their counterparty exposures and portfolios under a range of climate scenarios.

Members of the climate team at this GSIFI are responsible for measuring and managing the bank’s exposure to environmental threats. This includes comparing the outcome of internal analysis of the bank’s loan portfolios with an independent challenger model in order to meet regulatory requirements. These exercises require access to robust climate data and analytics to effectively model transition paths to net zero for the bank’s corporate clients.

Pain Points

The bank wanted to select a reliable, holistic bottoms-up approach covering both risks and opportunities, given the limited avenues for validation when it comes to assessing climate related credit risks

The climate team needs to consider stress testing the bank’s loan portfolios to uncover any potential vulnerabilities related to financed emissions. While they’ve built an internal model for this purpose and utilize a number of S&P Global’s environment datasets already as part of their analysis, the climate team wanted to also adopt a challenger model that could help independently assess their approach to quantifying climate related credit risks:

• A sound methodology to evaluate transition paths to net zero under different climate scenarios.
• A standardized yet thorough assessment framework for corporates.
• The ability to estimate impact on credit risk for small- and medium-sized enterprises (SMEs), where information is typically not reported.
• Portfolio-wide analysis of climate-related financial and credit risks.
• Capabilities to easily link internal and external data that use different classification schemes to have one unified database.  
• Efficient data access options to support analysis and the development of a company-wide data warehouse.

The team began discussions with S&P Global Market Intelligence (“Market Intelligence”) to learn more about the firm’s offering.

The Solution

Market Intelligence began by discussing Climate Credit Analytics (CCA), a climate stress‑testing framework and scenario analysis model suite, which was launched in 2021. CCA makes the critical link between climate change and credit risk by translating climate scenarios into drivers of financial performance (e.g., production volumes, fuel costs and capex spending) tailored to specific industries. These drivers are then used to forecast complete company financial statements under various climate scenarios, including those published by the Network for Greening the Financial System (NGFS), a group of over 120 central banks, financial authorities, and observers.^[2]

Developed through a collaboration between Market Intelligence and Oliver Wyman,^[3] CCA includes an automated capability to evaluate more than 1.6^[4] million public and private companies, as well as the ability for users to input proprietary information to expand this analysis. CCA covers five carbon-intensive sectors (Airlines, Automotive, Metal & Mining, Oil & Gas and Power Generation) and provides a generalised approach for all other sectors to complete the portfolio analysis.

CCA leverages Market Intelligence’s proprietary datasets and capabilities, including financial and industry-specific data, sophisticated quantitative credit scoring methodologies and company-level data from Trucost, the data and analytics engine that powers many of S&P Global’s ESG solutions. These capabilities would enable users at the bank to:

Key Benefits

Members of the climate team were impressed with the combination of Market Intelligence’s data resources and credit analytics’ and Oliver Wyman’s climate scenario and stress-testing expertise. The approach provided sufficient transparency and documentation on the approach as is needed for the purposes of a challenger model. The bank also saw immense value in having one well-respected provider of an extensive set of environmental capabilities, given that it was already subscribing to S&P Global’s environmental datasets.

A decision was made to utilize the Climate Credit Analytics offering to provide the bank with:

• A methodology to translate complex climate scenarios into drivers of financial performance that could clearly help challenge their internal modeling approach
• Ability to carry out stress tests, including sophisticated quantitative credit scoring.
• Comprehensive and consistent sector-specific modelling covering key high carbon-emitting sectors, plus others.
• A solution that leverages Market Intelligence’s proprietary datasets, including renowned financials and environmental information.
• Thorough technical and methodology documentation as is needed for audit and regulatory purposes
• Ongoing support to thoroughly understand the underlying data and methodologies.
• Improved workflows with easy integration of internal and external data using cross-referencing capabilities.  
• Access to a robust desktop solution with tech-forward productivity tools, plus feeds for seamless data delivery to an internal system paired with an API for interactive forecasting and scoring.

Click here to learn more about Climate Credit Analytics

Contact Us

Asia-Pacific

+852-2533-3565

Europe, Middle East & Africa

+44-207-176-1234

The Americas

+1 877 863 1306

Copyright © 2022 by S&P Global Market Intelligence, a division of S&P Global Inc. All rights reserved.

These materials have been prepared solely for information purposes based upon information generally available to the public and from sources believed to be reliable. No content (including index data, ratings, credit-related analyses and data, research, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of S&P Global Market Intelligence or its affiliates (collectively, S&P Global). The Content shall not be used for any unlawful or unauthorized purposes. S&P Global and any third-party providers, (collectively S&P Global Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Global Parties are not responsible for any errors or omissions, regardless of the cause, for the results obtained from the use of the Content. THE CONTENT IS PROVIDED ON “AS IS” BASIS. S&P GLOBAL PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Global Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

S&P Global Market Intelligence’s opinions, quotes and credit-related and other analyses are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P Global Market Intelligence may provide index data. Direct investment in an index is not possible. Exposure to an asset class represented by an index is available through investable instruments based on that index. S&P Global Market Intelligence assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P Global keeps certain activities of its divisions separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain divisions of S&P Global may have information that is not available to other S&P Global divisions. S&P Global has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P Global may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P Global reserves the right to disseminate its opinions and analyses. S&P Global's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge) and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P Global publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.