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The Climate Risk Tool Landscape 2022 Supplement: Featuring an anthology of implementation case studies from financial institutions

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Introduction

The importance of climate risk assessments

Societies, governments, and companies have justifiably recognized the threats climate change poses to the global economy. Physical risks such as droughts, sea level rise, and flooding are likely to increase in the coming years, with consequences for real assets, supply chains, and business operations. While critical, mitigating global warming poses challenges as well. Businesses and countries will experience transition risks in the shift from a fossil fuel-driven economy to a low-carbon one.

The financial sector has a central role to play in managing climate-related risks and providing capital for climate resiliency and the low-carbon transition. As a result, a wide range of stakeholders have shown interest in how financial institutions are preparing to confront climate change.

  • Activists and civil society have added public pressure for financial institutions to demonstrate that their activities are contributing to a sustainable future.

  • National and local governments that have committed to reducing emissions are looking to the financial sector to catalyse the development and deployment of projects that will help them reach those goals.

  • Financial supervisors and policy-makers around the world are aware of how climate change can threaten financial stability and have been increasingly setting climate risk management expectations and mandating climate disclosures, climate transition plans, and climate stress testing.

  • Shareholders in financial institutions are eager to understand how firms are preparing to confront both physical and transition risks in their portfolios.

  • Internal management within financial institutions want to identify the key risks and opportunities that a changing world presents and ensure that their firm is well-positioned.

In recent years, financial institutions have been exploring data, tools, and analytics that will enable them to meet the needs of these stakeholders. While many institutions are developing in-house climate capabilities, most are also working with outside vendors to obtain the skills, information, and outputs they require. As a result, there is a burgeoning market for climate solution providers for financial institutions to choose from. These providers can range from public data sources from organizations such as the United Nations and the World Bank to paid providers who can create bespoke tools for an institution.