A webinar themed Environmental Risk Analysis was held by ICBC and PwC, together with the GIP Secretariat, on December 17, 2020. It featured three expert speakers who shared methodologies and cases from financial institutions.

Dr. MA Jun, co-chair of the GIP Steering Committee, underlined in his welcome remarks the importance for financial institutions to quantify environmental risks, which has been one of the priorities for capacity building among GIP members. ERA is gaining more attention from the financial sector as well as the regulators, he introduced. The Central Bank and Supervisor’s Network for Greening the Financial System (NGFS) recently published an occasional paper and a casebook on Environmental Risk Analysis, which would be presented later during the webinar.

Bernhard SCHIESSL, COO and director of CICERO Shades of Green, gave a brief overview of climate-related physical and transition risks and how their assessments were incorporated into the certification of green bonds. In the second opinion process for green bonds, experts will bring up a comprehensive set of questions ranging from the identification and assessment of potential climate-related risks – types, exposure, and scenarios –to management and disclosure to ensure more effective communication of such risks to investors and inform decision- making.

Dr. YIN Hong, deputy director of Modern Finance Institute of ICBC and co-chair of the GIP WG1, shared the case from ICBC on environmental stress testing. Dr. Yin presented the general procedure of stress tests and an overview of tests that ICBC has carried out. Illustrating a test conducted in the thermal power sector, she demonstrated how the stress from tightening environmental standards or the presence of a carbon market could transmit under three levels of scenarios and have significant financial impact on small and medium-sized enterprises. The model can potentially be applied to other commercial banks on their portfolios and inform strategy making related to carbon- intensive sectors.

Dr. SUN Tianyin, Senior Researcher at the Research Centre for Green Finance Development at Tsinghua University, a contributing author of the NGFS ERA handbook, demonstrated two risk analysis models, respectively on the transition risks of the thermal power sector and the physical risks of mortgages. On the transition side, dropping demand and higher cost due to carbon price could potentially drive up the probability of default on thermal power-related loans. On the physical side, with the exacerbation of typhoons by climate change, the future default probability of mortgage could even double or more in extreme scenarios, comparing to that of base scenario without climate change.