Banco Bilbao Vizcaya Argentaria : New methodologies to help banking industry face climate change published today

The project has been coordinated by the United Nations Environment Programme-Finance Initiative. The publication of these new methodologies, which support the implementation of the recommendations of the Financial Stability Board's (FSB) Task Force on Climate-related Financial Disclosures (TCFD), comes after the release in April of a preliminary methodology focused on the assessment of transition risks.

On the occasion of the publication of the methodologies, - Eric Usher, Head of UNEP Finance Initiative, spoke about the value of the initiative: 'For financial institutions and other market actors, effectively managing and responding to climate change always means two things: understanding and responding to the intensifying physical impacts of unavoidable climate change; and also mitigating the risks and seizing the opportunities from the decarbonization of the economy. We are proud of our collaboration with these 16 leading banks and Acclimatise in the development of methods and tools that will help the global financial industry respond to climate change in a holistic manner, spanning both the physical and transition dimensions of the challenge.'

Using the methodologies, banks can begin to assess physical climate risks in their loan portfolios, evaluating the impacts on key credit risk metrics - Probability of Default (PD) and Loan-to-Value (LTV) ratios. The forward-looking assessments offer longer-term insights that go beyond the usual stress-testing horizon of 2-3 years.

The methodologies were first piloted across three climate-sensitive industry sectors: agriculture, energy and real estate. First piloting results demonstrate the need for a balanced approach to assessing the risks to banks' clients and loan books from both incremental climate change and increasingly frequent and extreme weather events.

Extreme events often attract more attention as their impacts are more apparent, but incremental changes have the potential to gradually erode the financial performance of entire borrower segments. Understanding these phenomena and how they translate into financial risk and opportunity is fundamental to banks' strategies to increase their resilience to a changing climate.

In this respect, Richenda Connell, CTO and cofounder of Acclimatise, the environmental advisory that took part in the project, noted the advantages of the initiative's results at the time of assessing risks and opportunities: 'The physical impacts of climate change may pose a risk to banks' loan portfolios. The innovative methodologies published today provide foundations which can be built upon, as research and data analytics improve. Once banks understand the scale of the risks, this will be a milestone that will encourage other corporates to take climate risk management seriously. Building resilience to physical climate impacts also presents banks with investment opportunities. Those that understand this best will have a competitive advantage.'