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Our paper is published on Arxiv

The initial Climate-Extended Risk Model (CERM) addresses the estimate of climate-related financial risk embedded within a bank loan portfolio, through a climatic extension of the Basel II IRB model. It uses a Gaussian copula model calibrated with non stationary macro-correlations in order to reflect the future evolution of climate-related financial risks. In this complementary article, we propose a stochastic forward-looking methodology to calibrate climate macro-correlation evolution from scientific climate data, for physical and transition efforts specifically.


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Finastra becomes a member of Green RWA!

Au-dessus de la Terre

How banks can save the planet

Mountain Drone

Climate Change Value Adjustment

This model from Chris Kenyon and Mourad Berrahoui is an approach that looks at the difference between the average expected loss with and without taking into account a climate risk.

This risk is modeled by a simple parametric form of the default rate, each form being quite intuitive and linked to a stress induced by a physical or a transition risk. It is relatively easy to set up. On a portfolio, you can put one form per line of credit.

There is no systemic risk aspect since it is an approach based on expected average losses.

Climate Change Value Adjustment

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The CERM - Executive Summary

Following the publication of the CERM model, Green RWA publishes an explanatory note of the model. 

CERM Model - Exec Summary

Le modèle CERM - Résumé

The CERM - Quantitative Paper

Green RWA is very pleased to publish the CERM Climate-Extended Risk Model of Josselin Garnier, to which the association collaborated through Jean-Baptiste GaudemetAnne Gruz and Olivier Vinciguerra.

This is a milestone in our mission as this solid and versatile framework should allow financial institutions to:

1. Model any type of bank loan portfolio dynamics:
- Any distribution of credit and climate ratings, any type of rebalancing strategy.
- Any distribution of groups of borrowers with homogeneous climate risk profiles.
2. Measure the total long term credit cost:
- Cost of risk increase resulting of the overall increasing risk.
- Capital charge cost increase resulting of the increasing correlation to systematic risk.
3. Optimize a climate strategy:
- Rebalancing strategy on greener borrowers or greener collateral assets.
- Financing climate adaptation and carbon mitigation projects, working with their clients.

This paper is intended to quants and will be followed shortly by a descriptive paper of its mechanism and practicalities.
We are looking forward to working with our corporate partners and with banks to test and adapt the model on sample portfolios.


To read the full version of the white paper, please contact us.
White Paper 1

Green RWA believes that regulated capitalism through banks, can contribute to free the planet from the deadly threat created by an extremely fast and energy-thirsty growth over the last 150 years. On top of Green Bonds, banks, by analysing their climate-related risks, will have to shift their banking book to optimise their long term capital charges, contributing to the $600B of green investments needed each year (on top of the $5,700B annual infrastructure investments) for the next 15 years. This is the OECD estimate to reach the Paris agreement goal of limiting global warming well below 2.0 degrees by 2100.

This first publication aims to illustrate the debate on the banks' role in the economy and it will be, as such completed, in late 2020 where we will gather real-life data and business cases from financial institutions, risk managers, climate experts and ESG data providers to an extended model including detailed portfolios by activities and geographies, transition matrices and correlation analyses (specifically GDP-CO2 correlation).

To read the full version of the white paper, please contact us.