Developing climate change scenarios encompassing realistic and thinkable impacts on the credit health of a bank is a high priority initiative of the financial industry. The problem is to understand the realized weather phenomena (primarily precipitation, temperature, wind) on a sufficiently fine geographic scale, exploiting regional circulation models, as far as feasible, to help with interpolation where appropriate, to obtain order-of-magnitude assessments of risks of drought, wildfire, flood/tsunami, storm, including possible combinations of such events. Further, it is necessary to understand the downstream costs (insurance and otherwise) and effects of such events, at a local level, on the various economic sectors, such as agriculture, utilities, and heavy industry, while also understanding that mitigation strategies will have a cost and an effect. In some cases, there will be benefits derived from climate change which should also be understood, such as changes in agricultural potential in regions. Ultimately, banks want to be able to assess the resulting credit risk in this dynamic environment. This panel discussion brought together three experts – Phillip Ashby, Miguel Molico, and Francis Zwiers – to discuss their current work in these areas.
The panel discussion took place on October 30, 2020, with 47 registrants and 30 attendees. The financial impact of climate change was discussed with emphasis placed on the need for a better understanding of physical and transition risks specifically, and more generally, and liability risk. The potential for integrating new knowledge from studies of data-driven climate scenarios into financial models was discussed and requires the identification and adoption of key metrics that monitor each of these three risks. Credible estimates of climate risk need to be integrated into multiple elements of risk management, such as the time frames of climate change that are much longer than the one-to-five-year outlook of financial systems. Insurers, banks, and asset managers are facing significant challenges associated with the adjustment of stress testing that accounts for the ramifications of climate change on all these risk types.
Organizers: John Braun (University of British Columbia — Okanagan), Matthew Davison (University of Western Ontario), Joan Hu (Simon Fraser University), Mark Reesor (Wilfrid Laurier University), and John R.J. Thompson (Wilfrid Laurier University).