Presentation of the Environmental Stress Testing Tool at the UNEP FI Global Roundtable 2016
25 & 26 October 2016, Dubai, UAE
The annual Global Roundtable (GRT) 2016 facilitated by the United Nations Environment Programme Finance Initiative (UNEP FI) is a key event for global leaders and agenda setters seeking to promote the green transformation of the financial sector. Dedicated to the implementation of the Paris Climate Agreement and the Sustainable Development Goals (SDGs), hundreds of leaders from all parts of the financial system as well as from civil society, academia, government and the United Nations gathered in Dubai to share knowledge on approaches, instruments, and experiences.
The analysis of environmental risks in financial institutions played an important role at the event. Against this backdrop, EMDF Project Manager Yannick Motz presented the Environmental Stress Testing (EST) Tool which emerged from a joint project with the Natural Capital Finance Alliance and a global coalition of financial institutions from Brazil, China, Mexico and the U.S.. Developed by a consortium composed of the world’s leading catastrophe modeling firm RMS and academics from the University of Cambridge and the University of Oxford, the open-source tool enables banks to embed the impact of environmental shocks, in particular drought events, in the performance analysis of their corporate loan portfolio. Thereby the tool takes nine to ten industries per target country into consideration. In order to reflect the potential impact of a drought on the performance of a loan, the tool includes a vulnerability as well as a macroeconomic model and framework to translate the drought scenarios into measurable results. Ultimately, the user of the tool will receive updated probability of default, credit rating and expected losses.
At the closing of the 14th edition of the GRT, Saker Nusseibeh, CEO Hermes Investment Management, pointed out the duty of financial institutions to actively promote a green transformation of our economies. Instruments like the EST Tool incentivize banks and financial actors to invest in environment-friendly corporates, projects, and industries, while increasing their resilience against impacts of environmental shocks. Therefore, the EST tool contributes to the development of a stable and sustainable green financial system.