Environmental Scenario Analysis

Environmental Scenario Analysis

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This joint project of the University of Cambridge Institute for Sustainability Leadership (CISL) and the Emerging Markets Dialogue on Finance (EMDF) focuses on improving the integration of environmental risks into financial decision-making in emerging markets. Specifically, its aim is to empower financial institutions and their respective regulators in two countries, South Africa and Mexico, with insights that enable them to take demonstrable new actions to embed environmental scenario analysis into routine decision-making.

Increasing financial institutions’ resilience to environmental shocks such as droughts or flooding is critical to avoiding large unexpected financial losses, thereby contributing to financial stability in emerging markets. Recommendations issued by the G20 Green Finance Study Group (GFSG) and the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD), both published in 2017, stress the importance of using forward-looking scenario analysis in financial decision-making.

Due to the increasing awareness of environmental risks among financial institutions at the global level, a number of tools have been developed to assess risks arising from environmental hazards over the past years. One example is the drought stress-testing tool developed by EMDF and the Natural Capital Finance Alliance in partnership with banks and research partners.

However, for most financial institutions in emerging markets and developed markets alike environmental scenario analysis is, as of yet, unchartered territory. One of the key challenges is that financial institutions need to expose their strategy, risk and regulatory affairs teams to rather new areas of knowledge – ranging from drought risk to the energy transition – in such a way that confidence can be built and new decisions made. This is no small task and will stretch the capacity of all but the largest and most progressive of financial institutions.

This project provides a first step in building that capacity by producing tailor-made primers for the South African and Mexican regulators and financial firms on how to develop environmental scenario analysis relevant to their own national contexts. The outcome is not to add to the growing number of environmental scenario analysis tools and methodologies that are being created, but rather, offer practitioners in these markets a resource that helps them understand why and how to use such tools in their particular context.


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South Africa