CLARISA: Climate-related Risk Assessment & Scenario Analysis

Advancing global warming will have severe consequences for the ecosystem, the economy and society implying profound risks for businesses. One the one hand, this is due to physical impact related to climate change, and on the other hand it is related to developments accompanying the low-carbon transition. To acknowledge the importance of these risks for financial stability, the BaFin (Federal Financial Supervisory Authority) published a Guidance Notice on Dealing with Sustainability Risks in 2019. It is expected that supervised entities adapt their risk management to adequately consider relevant risks. Sustainability risks are considered ESG risks and comprise environmental (E), social (S) and governance (G) risks. Depending on future developments, these risks will unfold in different intensity and through existing risk types. The assessment of sustainability risks poses various challenges for financial institutes and shows limitations of traditional risk management.

To meet the requirements, a complementary approach is needed which exceeds the economic perspective and covers different dimensions of the socio-ecological transformation. Complex interdependencies of ecological, economic and social systems as well as non-economic aspects should be considered. The traditional approach poses the danger that major risks remain uncovered or are underestimated which might have serious financial consequences. Quantitative and qualitative scenario analysis are crucial elements of a holistic approach, which the GLS Gemeinschaftsbank eG aims to develop.

The goal of the project CLARISA is to improve the assessment of sustainability risks through scenario analysis in cooperation with the GLS Gemeinschaftsbank eG. The focus is on the transfer of complex interrelation between the macro- and micro level into financial risk management. In a first step, internationally recognised scenarios - such as the RCP scenario, the shared Socioeconomic Pathways (SSPS) and the NGFS Scenarios - are analysed to identify main assumptions. On this base, consistent qualitative scenarios will be developed in the second step to identify main drivers and relevant risks. A system dynamic analysis will examine the interconnections between risk drivers and risks in the context of the financial sector. In a third step, the results of the qualitative scenario analysis are incorporated in a quantitative database for a sector- and company-specific application to evaluate risks of financial institutes.