Mainstreaming climate risk appraisal methods

6-Step Methodology for Climate Risk Assessment 🌎 Addressing climate-related risks is increasingly essential as extreme weather events, resource scarcity, and ecosystem disruptions become more frequent and severe. Effective Climate Risk Management (CRM) equips governments, organizations, and communities with the tools to anticipate, prepare for, and mitigate these impacts. A structured approach to climate risk assessment not only identifies vulnerabilities but also informs proactive measures that protect lives, livelihoods, and essential infrastructure. The GP L&D’s 6-step methodology offers a practical, systematic framework for understanding and addressing climate risks, integrating these insights into public policies and investment decisions to build resilience and promote sustainable development. The first step in this methodology is to analyze the current status to determine information needs and set specific objectives. Establishing a clear baseline of vulnerabilities helps ensure that the entire process remains aligned with the climate resilience goals set out from the start. From here, a hotspot and capacity analysis is conducted, identifying regions and systems most exposed to climate risks—such as droughts or floods—and evaluating the local capacity to respond. This targeted analysis allows for efficient resource allocation by pinpointing areas of highest priority. The methodology then adapts to local contexts by developing a tailored approach that reflects unique socio-economic and environmental factors. This customization enhances the relevance and accuracy of the risk assessment, making it more actionable and specific to each setting. Following this, a comprehensive risk assessment is conducted, using both qualitative and quantitative measures to capture the full range of potential impacts. This dual assessment provides a complete understanding of direct impacts, such as infrastructure damage, and indirect consequences, like disruptions to livelihoods. An evaluation of risk tolerance follows, defining acceptable levels of risk and helping prioritize the most urgent interventions. This clarity on risk thresholds ensures that resources are directed to where they are most needed. Finally, the methodology identifies feasible, cost-effective measures to mitigate, adapt to, or prevent potential losses and damages. This step aligns recommended actions with budget and policy constraints, ensuring that interventions are practical and impactful. By adopting this structured approach, decision-makers can better manage climate risks, develop adaptive strategies, and enhance resilience tailored to local needs and resources. Source: Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) #sustainability #sustainable #business #esg #climatechange #climateaction

💸 $𝟭𝟮.𝟱 𝘁𝗿𝗶𝗹𝗹𝗶𝗼𝗻 𝗶𝗻 𝗰𝗹𝗶𝗺𝗮𝘁𝗲-𝗿𝗲𝗹𝗮𝘁𝗲𝗱 𝗹𝗼𝘀𝘀𝗲𝘀 𝗯𝘆 𝟮𝟬𝟱𝟬, 𝗮𝗿𝗲 𝘄𝗲 𝗽𝗿𝗶𝗰𝗶𝗻𝗴 𝘁𝗵𝗮𝘁 𝗿𝗶𝘀𝗸 𝗶𝗻𝘁𝗼 𝘁𝗼𝗱𝗮𝘆’𝘀 𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁𝘀? The new PCRAM (Physical Climate Risk Appraisal Methodology) framework and tool from Institutional Investors Group on Climate Change (IIGCC) gives investors a clear, practical way to assess and act on physical climate risk. Here’s why it matters: 🔹𝗦𝘆𝘀𝘁𝗲𝗺𝗶𝗰 𝘀𝗰𝗼𝗽𝗲: Goes beyond individual assets to evaluate risks across funds and portfolios, including interdependencies with surrounding systems. 🔹𝗠𝘂𝗹𝘁𝗶𝗱𝗶𝘀𝗰𝗶𝗽𝗹𝗶𝗻𝗮𝗿𝘆 𝗶𝗻𝘁𝗲𝗴𝗿𝗮𝘁𝗶𝗼𝗻: Brings together climate science, engineering, and finance into one replicable and practical framework. 🔹𝗥𝗲𝘀𝗶𝗹𝗶𝗲𝗻𝗰𝗲 𝗮𝘀 𝘃𝗮𝗹𝘂𝗲: Shifts the lens from cost and loss to resilience premiums like stable returns, stronger credit quality, and reduced lifecycle costs. 🔹𝗦𝘁𝗮𝗻𝗱𝗮𝗿𝗱𝗶𝘀𝗲𝗱, 𝘁𝗿𝗮𝗻𝘀𝗽𝗮𝗿𝗲𝗻𝘁 𝗽𝗿𝗼𝗰𝗲𝘀𝘀: Follows a 4-step approach: scoping, materiality, resilience building, and financial analysis, scalable across geographies and sectors. 🔹𝐁𝐫𝐨𝐚𝐝𝐞𝐫 𝐚𝐝𝐚𝐩𝐭𝐚𝐭𝐢𝐨𝐧 𝐬𝐭𝐫𝐚𝐭𝐞𝐠𝐢𝐞𝐬: Incorporates nature-based solutions and explores insurability and credit-strengthening opportunities. 𝘊𝘭𝘪𝘮𝘢𝘵𝘦 𝘳𝘪𝘴𝘬 𝘪𝘴 𝘪𝘯𝘷𝘦𝘴𝘵𝘮𝘦𝘯𝘵 𝘳𝘪𝘴𝘬. We need to act not just to climate-proof portfolios, but to future-proof capital. Read the report and explore the tool → link in comments. #ClimateRisk #ClimateFinance #Investors #PhysicalRisk #RealAssets #ESG #NetZero #IIGCC #AdaptationFinance #ResilienceInvesting

🎯 The Hidden Foundation: Why Climate Risk Assessment Makes or Breaks NGO Projects After managing climate resilience initiatives across diverse contexts, I've discovered that the difference between projects that transform communities and those that simply spend budgets lies in one critical phase: comprehensive risk assessment. Most NGOs rush to solutions without truly understanding the risk landscape they're entering. The 4-Dimensional Risk Assessment Framework: 🌡️ Climate Hazard Mapping • Historical climate data analysis • Future projection scenarios • Extreme event frequency and intensity • Seasonal variability patterns 👥 Social Vulnerability Analysis • Demographic risk factors (age, gender, disability) • Economic exposure levels • Social network strength assessment • Cultural and linguistic considerations 🏗️ Infrastructure Vulnerability Review • Critical system dependencies • Redundancy and backup systems • Maintenance capacity evaluation • Technology appropriateness assessment 🌍 Ecosystem Services Evaluation • Natural buffer system health • Environmental degradation trends • Biodiversity loss impacts • Ecosystem restoration potential Critical insight: Risk assessment isn't a one-time activity—it's an ongoing process that should inform every project decision from design to implementation. What separates successful projects: They design for the worst-case scenario while building capacity for best-case outcomes. Practical tip: Spend 20% of your project design time on risk assessment. Communities that understand their full risk profile make better adaptation decisions. How do you approach risk assessment in your climate resilience projects? What risk factors do you find most organizations overlook? #ClimateRisk #NGOProjects #NGOs #ClimateResilience #RiskAssessment #ProjectDesign #project #projectmanagement #managers #sustainability #eu #europe #Africa #Egypt #Mediterranean

Setting up the framework to operationalise the macroprudential dimension of the response to climate risk - this was the ambition of the final report of the European Central Bank & European Systemic Risk Board Project Team on climate risk. After exploring the financial materiality of climate risk and identifying the macroprudential dimension of this risk, this report bridges an important gap from the case for action to policy intervention. The report does not argue for the immediate implementation of macroprudential interventions as supervisory authorities are currently ramping up the microprudential policy response to climate risk which is both a priority and the necessary first step. Yet, it insists on the complementarity of the two approachs and the need to prepare for the next step through a close monitoring and adapting the available policy instruments. Five take aways that should inform the thinking on the macroprudential policy response to climate risk: 1️⃣ Climate risks are concentrated both among non financial actors (e.g. corporates and households) and within the financial sector (e.g. uneven distribution of the risk among banks) - this is probably the most pressing macroprudential feature of climate risks. 2️⃣ Amplification channels are likely to play an important role in case of climate related losses or repricing - the most exposed financial institutions are not isolated from the rest of the financial system and their common exposures/similar portfolio imply that shocks will not be idiosyncratic shocks. 3️⃣ An important initial step of the macroprudential policy reponse is to clarify (i) the main features to be addressed and (ii) how best to complement microprudential policy and adapt to the evolving climate situation and policy landscape. 4️⃣ Operationalising a common macroprudential strategy across EU countries and sectors is already feasible. Targeted (legislative) amendments could be beneficial but by and large, we don't need new legislation to develop a gradual, targeted and scalable macroprudential approach. 5️⃣ As always, macroprudential policy starts with monitoring, analysing and communicating. In that respect, with this publication and the mainstreaming of climate risk in the usual policy groups, we are already implementing the first steps of a common European macroprudential strategy to manage climate risk. As a bonus, the report also delved on the broader issues of nature related risks (something that is for a separate post). 👏 Congratulations to my co-chair Paul Hiebert for his leadership (also to Morgan Després who preceded me in co-chairing this team), to Stephan Fahr, Thomas Allen, Richard Senner, Ludivine Berret, Michael Grill, Fabio Tamburrini Laura Parisi & Julia Prodani for the excellent steering of the working groups, to Pablo Serrano Ascandoni, Dejan Krusec & Jacques de la Rue du Can for the support and to all the (many) project team members for their contribution. https://lnkd.in/esD8D-E2

𝗕𝗥𝗘𝗔𝗞𝗜𝗡𝗚 𝗡𝗘𝗪𝗦- after 1,5 years, our 𝗖𝗹𝗶𝗺𝗮𝘁𝗲 𝗥𝗶𝘀𝗸 𝗦𝘁𝗿𝗲𝘀𝘀 𝗧𝗲𝘀𝘁𝗶𝗻𝗴 𝗠𝗲𝘁𝗵𝗼𝗱𝗼𝗹𝗼𝗴𝘆 benchmarking paper with UNEPFI is finally out! 💡What started as an idea almost 2 years ago is now finally coming to life. 🔭After numerous workshops and survey sessions with 20+ UNEPFI banks . 📝Long hours researching, discussing, summarizing, writing. Our report now synthesizes all this collected and public information in one place to help finance professionals 𝗻𝗮𝘃𝗶𝗴𝗮𝘁𝗲 𝗲𝗺𝗲𝗿𝗴𝗶𝗻𝗴 𝗰𝗹𝗶𝗺𝗮𝘁𝗲 𝗿𝗶𝘀𝗸 𝘀𝘁𝗿𝗲𝘀𝘀 𝘁𝗲𝘀𝘁𝗶𝗻𝗴 𝗽𝗿𝗮𝗰𝘁𝗶𝗰𝗲𝘀 and strengthen their risk management capabilities. We have developed this report as collaboration between SAS and the United Nations Environment Programme Finance Initiative (UNEP FI) and their 20+ banks. Based on survey and workshops conducted with 20+ UNEPFI bank this report explores: 📌What are the common scenarios, approaches and assumptions applied by banks for assessing Transition and Physical risks 📌Which risk measures banks use to simulate the 𝗳𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝗶𝗺𝗽𝗮𝗰𝘁 𝗼𝗳 𝗰𝗹𝗶𝗺𝗮𝘁𝗲 𝗿𝗶𝘀𝗸𝘀 📌How do banks adress and manage 𝗠𝗼𝗱𝗲𝗹 𝗥𝗶𝘀𝗸 embedded in their climate risk models 📌To what extent is climate stress 𝗶𝗻𝘁𝗲𝗴𝗿𝗮𝘁𝗲𝗱 with bank's other forward looking processes📌How vital is the 𝘀𝘂𝗽𝗽𝗼𝗿𝘁𝗶𝗻𝗴 𝗿𝗼𝗹𝗲 𝗼𝗳 𝗮 𝗿𝗼𝗯𝘂𝘀𝘁 𝗜𝗧 𝗶𝗻𝗳𝗿𝗮𝘀𝘁𝗿𝘂𝗰𝘁𝘂𝗿𝗲 for an efficient and integrated climate risk stress testing 📌𝗖𝗮𝘀𝗲 𝘀𝘁𝘂𝗱𝗶𝗲𝘀 & 𝗰𝗼𝗻𝗰𝗿𝗲𝘁𝗲 𝗲𝘅𝗮𝗺𝗽𝗹𝗲𝘀 of how banks adress climate risk management 📌Expert perspectives on 𝘁𝗵𝗲 𝗿𝗼𝗮𝗱 𝗮𝗵𝗲𝗮𝗱 for the climate risk stress testing discipline Additionally, the report highlights areas for further enhancement in climate stress testing methodologies. By presenting 𝗴𝗼𝗼𝗱 𝗽𝗿𝗮𝗰𝘁𝗶𝗰𝗲𝘀 𝗳𝗼𝗿 𝗯𝗲𝗻𝗰𝗵𝗺𝗮𝗿𝗸𝗶𝗻𝗴 and identifying areas for prioritization I am confident this report will help institutions in 𝗺𝗼𝘃𝗶𝗻𝗴 𝘁𝗵𝗲𝗶𝗿 𝗖𝗹𝗶𝗺𝗮𝘁𝗲 𝗥𝗶𝘀𝗸 𝗦𝘁𝗿𝗲𝘀𝘀 𝗧𝗲𝘀𝘁𝗶𝗻𝗴 𝗽𝗿𝗼𝗰𝗲𝘀𝘀 𝘁𝗼 𝘁𝗵𝗲 𝗻𝗲𝘅𝘁 𝗹𝗲𝘃𝗲𝗹. 🎢What a journey this was. I am so grateful for the opportunity to be part of this exercise and co-lead this great initiative. 👏My big thanks and congratulations go to the report team: Maheen Arshad, Melanie O'Toole, Arjun Mahalingam,David Trinh for this excellent work. The report download link can be found below. I am happy to provide more details and eager to hear your thoughts.

I recently reviewed the new UNEP FI & SAS report: Climate Stress Testing Methodologies: Current Practices, Challenges, and the Road Ahead (2025). Key insights that resonated: Maturity and adoption: More than 90% of banks surveyed now perform internal climate scenario analysis a clear shift toward proactive climate risk management. Scenario design: The combined use of NGFS and IPCC scenarios enables banks to assess both long-term transition pathways and short-term shocks with greater precision. Granular modelling: There’s a strong move toward bottom-up analyses assessing counterparty-level impacts of transition and physical risks on credit parameters like PD and LGD. Integration: Some banks are now embedding climate factors directly into Model Risk Management, credit impairment, and capital adequacy models. Technology: AI, data integration, and automation are becoming vital to improve transparency and scalability in stress testing What’s next: The report highlights the next phase integrating nature and social risks, refining short-term scenario design, and strengthening governance and internal modelling capabilities. As the sector progresses, it’s clear that climate stress testing is no longer just about risk quantification it’s about enabling strategic resilience and credible transition planning. #ClimateRisk #Sustainability #Banking #ESGRisk #StressTesting #UNEPFI #RiskManagement #ClimateFinance #TransitionRisk #PhysicalRisk #SAS

"Renewable Energy in Climate Change Adaptation: METRICS AND RISK ASSESSMENT FRAMEWORK INTRODUCTION" by International Renewable Energy Agency (IRENA) RISK ASSESSMENT IN THE ADAPTATION PROCESS 🔅Risk in the context of IPCC reports The IPCC defines climate risk as the intersection of: 📍Hazards: Physical climate events (e.g., drought, heatwaves). 📍Exposure: People and assets in harm's way. 📍Vulnerability: Susceptibility to damage and lack of coping capacity. 🔅 Risk assessment framework Risk assessments rely on tools like: 📍Vulnerability assessments (e.g., impact chain method). 📍Scenario analysis using climate pathways (e.g., RCP2.6, RCP8.5). 📍Cost-benefit analysis, GIS mapping, and participatory methods. The impact chain method, aligned with GIZ’s Vulnerability Sourcebook, is used to quantify risk by integrating hazard, exposure, and vulnerability indicators, normalized and weighted to produce a risk index. 🔅Introducing the Impact Chain Method 💠STEP 1: Identify Risk Risk: Increased energy demand and emissions due to higher reliance on desalination, driven by declining rainfall and water scarcity. Over 70% of water consumed on the Canary Islands is desalinated. Desalination already accounts for 10% of electricity demand in Gran Canaria. 💠STEP 2: Identify Hazards, Vulnerability, and Exposure Hazard: Decreasing rainfall, measured by SPEI (Standardised Precipitation Evapotranspiration Index). Exposure: 📍Population density: 0.39 (normalized score). 📍Tourist-to-resident ratio: 0.95 📍Tourism seasonality: 0.13 📍% of desalinated water: 0.40 Vulnerability: 📍Energy intensity: 0.20 📍Per capita electricity demand: 0.19 📍Purchasing power: 0.66 💠STEP 3: Develop Indicators Hazard indicator: SPEI values (drought index). Exposure indicators: Population, tourism volume, % desalinated water. Vulnerability indicators: Energy use per GDP, per capita demand, income. 💠STEP 4: Introduce Thresholds and Normalise Indicators Indicators are normalized on a 0–1 scale for comparability. Example: 📍Max tourist-to-resident ratio in EU: 4.42 = normalized score of 1. 📍Population density max: ~1373/km² (Malta) = normalized max. 📍Desalinated water share in some islands: 100% = score of 1. 💠STEP 5: Present Results Energy demand for desalination: 📍Present: 1,121.4 GWh/year 📍RCP2.6 (2046–2065): 1,749.4 GWh/year (+56%) 📍RCP8.5 (2046–2065): 2,063.4 GWh/year (+84%) Normalized hazard scores (based on SPEI): 📍Present: 0.00 📍RCP2.6: 0.56 📍RCP8.5: 0.84 Weighting of risk components (from correlation analysis): 📍Exposure: 35% 📍Vulnerability: 34% 📍Hazard: 31% Final risk scores: 📍Present climate: 0.29 (low) 📍Mid-century RCP2.6: 0.46 (medium) 📍Mid-century RCP8.5: 0.54 (medium–high) Risk scale interpretation: 📍0.0–0.2 = Very low 📍0.2–0.4 = Low 📍0.4–0.6 = Medium 📍0.6–0.8 = High 📍> 0.8 = Extremely high With 100% renewables in energy mix: 📍Risk under RCP2.6: drops from ~0.47 to ~0.34 📍Risk under RCP8.5: drops from ~0.55 to ~0.39

👏 EU Advisory Board Pushes for Standardised Climate Risk Management and Scenario Analysis A new report from the European Scientific Advisory Board on Climate Change warns that changes introduced in the recent #Omnibus I package may weaken the oversight and management of #climaterisks in the wider EU economy. As climate risks are not necessarily proportionate to business size – for instance, small banks are often relatively more exposed to physical climate risks given the nature of their lending (e.g. in the property or agriculture sectors) – the use of a single #CSRD threshold based only on business size and turnover can lead to uneven and disproportionate coverage of climate risk information.  The report says #climateriskassessments must move from fragmented practice to harmonised, mandatory inputs across EU policy, finance and corporate reporting. Why? Because the consideration of future climate risks across EU instruments and sectors remains uneven, with gaps to be addressed. Requirements on the use of #climatescenarios are often implicit (e.g. as part of a required risk assessment) or vague, giving examples of potential approaches. While it is important to allow the approach to be tailored to local contexts, this can contribute to an underestimation of climate risks and an incoherent approach across the EU.  In ESRS reports, risk assessment is typically informed by at least one high emissions pathway for the assessment of physical risks, with examples referring to SSP5-8.5 and various Network for Greening the Financial System (NGFS) scenarios. 👉 Here are three implications: 1. Climate risk disclosure will become more standardised and more comparable The report explicitly calls for harmonised climate risk assessment methodologies and scenarios, and for climate risk management to be fully integrated into corporate reporting and financial supervision. This aligns directly with CSRD and #ESRS E1 Climate Change, which already require companies to assess physical and transition risks, but expect increasing methodological convergence across the EU. 2. Scenario analysis expectations will likely tighten The Advisory Board recommends using a common adaptation planning reference based on a 2.8–3.3°C warming pathway (IPCC SSP2-4.5), with more severe scenarios (e.g. SSP3-7.0) used for stress-testing. 3. The EU should set out a clear vision for a climate-resilient EU by 2050 and the longer-term, supported by sectoral strategies and cross-cutting adaptation targets. This vision should be grounded in science, EU commitments, and participation. 

With key questions being posed about the speed of the transition due to unfolding geopolitical events, we must not neglect the challenge that investors are also facing: physical climate risk.    Writing in Reuters, I make the case that "the question ⁠isn’t whether physical climate risk is financially material…the question now is whether we can close the gap between knowing that and acting on it".   Highlighting the application of the Physical Climate Risk Appraisal Methodology (PCRAM) and two case studies, I set out how investors are “acting on it”, making decisions about investments in adaptation and resilience grounded in financial materiality. This includes long term revenue protection and insurability. Through this lens “physical risk is treated as a financial variable rather than ⁠an environmental footnote”.    As I say in the op-ed: "The choice is as simple as it is urgent: invest in resilience by design or pay for it by default."   🔗https://lnkd.in/eyXrxthD   Institutional Investors Group on Climate Change (IIGCC)   #adaptation #resilience #climatefinance

The UNEP FI – Bridging Climate and Credit Risk report delves into how 32 global banks are incorporating climate-related risks into their credit risk frameworks. These banks evaluate physical and transition risks across sectors like real estate, energy, and transport, focusing on exposure classes such as large corporates and SMEs. While expert judgment remains crucial, there is a notable shift towards data-driven approaches. The outcomes of climate risk assessments impact regulatory reporting, credit decisions, and client interactions, influencing activities like loan repricing and risk ratings. Despite progress in integrating climate risks into Probability of Default (PD) and Loss Given Default (LGD) models, their integration into internal models like IRB or rank-ordering is still limited. While scenario analysis, including NGFS scenarios, is prevalent, challenges persist with Scope 3 emissions data. More than half of the banks surveyed employ ESG scoring frameworks, but the methods of integration vary due to issues like data quality, methodological constraints, and resource limitations. The report advocates for refining climate-credit risk models, strengthening data governance, and promoting closer engagement with regulators. It emphasizes the necessity for banks to embrace proactive measures like stress testing, margin of conservatism, and broader sustainability integration to effectively navigate long-term climate-related credit risks.