Do you need assistance with the U.S. Federal Reserve Climate Scenario Pilot Program?
Overview:
The Federal Reserve Board has recently announced a pilot climate scenario analysis exercise that will be conducted with six of the nation's largest banks. This exercise is designed to help the Federal Reserve and these organizations better understand and manage climate-related risks. The pilot will be launched in early 2023, with the goal of enhancing supervisors' and firms' ability to measure and manage climate-related risks.
The 6 participating organisations in this pilot program are expected to provide an analysis of their exposure to physical and transition risks related to climate change by July 31, 2023. The Federal Reserve Board has also provided additional details on how the exercise will be conducted, including specific parameters for scenario analysis.
Participants
The 6 participating organisations in this pilot program are expected to provide an analysis of their exposure to physical and transition risks related to climate change by July 31, 2023. The Federal Reserve Board has also provided additional details on how the exercise will be conducted, including specific parameters for scenario analysis.
The 6 participating banks in Q1 2023 are:
Bank of America
Citigroup
Goldman Sachs
JPMorgan Chase
Morgan Stanley
Wells Fargo
Participants will submit completed data templates, supporting documentation, and responses to qualitative questions oriented around four primary areas:
Governance and risk management,
Measurement methodologies
Results
Lessons learned & Future plans.
This is not a Stress Test
The U.S Fed has stated:
"Climate scenario analysis is distinct and separate from bank stress tests. The Board's stress tests are designed to assess whether large banks have enough capital to continue lending to households and businesses during a severe recession. The pilot climate scenario analysis exercise, on the other hand, is exploratory in nature and does not have capital consequences."
You can download the 2023 U.S Federal Reserve (Fed) Climate Scenario Pilot Participant Instruction Here:
Narrative Driven Responses
Indicative qualitative questions for each of the four areas are provided below. More detailed questions and information related to submission materials and supporting documentation will be provided to participants through normal supervisory channels.
1. Governance and Risk Management. This section will cover the participant’s current governance and risk-management practices with respect to managing climate-related financial risks.
2. Measurement Methodologies. This section will cover the approaches used in estimating results for each scenario within the physical and transition risk modules.
3. Results. This section will cover the exercise results from both the physical and transition risk modules.
4. Lessons Learned and Future Plans. This section will cover lessons learned from the pilot CSA exercise and the participant’s forward-looking plans or strategies to manage and oversee climate-related financial risks.
Climate Scenario Analysis, Development, and Enrichment
At CLAIM8, we offer comprehensive scenario as a service offerings for organizations looking to participate in Climate Scenario programs.
We can help you understand your organization's exposure to physical and transition risks related to climate change through narrative development and exploratory exercises, as well as develop strategies for managing those risks effectively.
Our team of experts have extensive experience in conducting facilitated multi-stakeholder environments for developing various scenarios.
We have assisted the UN, Banks, Funds, Cop26/27, global enterprises, and investors on scenario development and analysis.
Our scenario enrichment process includes foresight into:
-
The direct impacts on property, assets, labor, and supply chains from geopolitical disruptions, climate-related events, such as floods and storms, and indirect impacts on blocked global supply chain or scarcity of resources.
-
The impacts that could arise if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible. Increasingly robust climate data may actually make it more difficult for parties to argue force majeure. Recent arbitral decisions have seen force majeure claims based on flooding and even refugee crises rejected on the basis of foreseeability.
-
The risks which could result from reassessment of the value of a large range of assets with a large volume of greenhouse gas emissions during the process of adjustment towards a lower carbon economy. This includes electrification and energy transition, finance, global supply chain remapping, and increasing scarcity of raw materials.
How we work
CLAIM8’s team will assist you in defining the conditions, locations, and materials issues needed as inputs to develop and conduct scenario analysis.
Scenario analysis is the most difficult part of climate risk management as it requires an expert level of talent across analytical, and creative abstraction to envision geopolitical, behavioral, and climate impacts. Additional polycrisis such as war, supply chains and the continuing pandemic all add complexity.
We conduct in person or remote workshops, scenario sessions and encode this work into tools that can be used to assist in climate scenario analysis and development and strategic planning for disclosure adn reporting.
Our climate scenario sessions are used for groups of 10 to 200 to explore, understand and analysis climate related risks with incorporating geopolitical macros, materials, energy, war, and and other complex interrelated global challenges.
We excel at complex multi-stakeholder engagements and have conducted scenario workshops for the UN, Banks, Funds, Microsoft, Cisco, City of NY, IBM, NASA, DoE, and others.
Climate Scenario Arenas of Risk
We have defined the below arenas of risk that are material to protecting enterprise value through better understanding of global value chains, externalities, and shareholder sentiment to improve resilience, edge, and conviction.
Enterprise Value
Impacts on operating costs & share price
Physical risk, market volatility, PR, disruption, mitigation, adaptation, compliance, insurance, raw materials, and increased labor issues can all reduce enterprise value
Mandatory disclosures, policy, governance, reporting, legal, technological, and market changes including stakeholder capitalism are complex and rapidly changing
Major investment needed in developing Supply Chain Resilience vs. Optimization
Assets
At risk now, or may become stranded soon
Write off or early retirement of assets or entire portfolios at risk due to location, sectors, policy, and/or investor preferences and advocacy
Financial asset price risk and dislocation
Includes residential and commercial RE, energy production facilities, manufacturing facilities, ports, fleets, tourism, and tax havens
Inversion of asset lifetime value calculations (5 to 10 years, shrinking from 20 to 30-year outlooks)
Reduced Demand for Goods & Services
Changing SKUs, social pressure, and reduced availability
Changing consumer preferences, regulatory, and supply chain transparency
Industry lacks the agility to change products and supply chains on demand
Increased transparency and disclosures reveal poor practices and ethics issues
Climate sensitive populations and locations have reduced spending power with scarcity and inflation
Fragile & Disrupted Supply Chains
Global trade routes, ports, labor, and materials
Market instability and shifting supply and demands for commodities. Ex: Lumber, metal, microchip, plastics, paper, fuel, and wheat shortages
Key commodity dislocations across lithium, copper, platinum group of metals, composites, and mining
Climate Vulnerable Trade Routes are remapping ports, canals, and ocean shipping lanes
Forced labor and unworkable or unsafe labor conditions due to heat, humidity, fires, and increasing workplace danger
Geo-Political Instability & Civil Unrest
Security, extreme weather, scarcity, and war can become more frequent and rapid
Unrest in one part of the world leads to instability across a complex globalized trade network
Increasing East and West national interests over global resources can lead to wars of energy, water, food, and goods
Increased optics on issues affect raw materials across agriculture, mining, and manufacturing outside of traditional industry players
Labor can become increasingly difficult to procure as workforces are more concerned about their health, safety, social issues, and security in a time of conflict
Insurance Force Majeure & Total Cost of Risk (TCOR)
Increased force majeure claims for extreme weather events prevent or eliminated payouts
Foreseeability (Sea level rise vs. 100 Year Storm)
Uninsurable Asset Classes, Business Activities, and Trade Routes
Insolvency and liquidity issues arise as exponential claims are paid out