THE CERM

Green RWA methodology applies to following categories of instruments prone to credit risk:

  • Corporate loans, corporate bonds and equity

  • Project finance

  • Asset finance

  • Mortgages

Green RWA has partnered with Professor Josselin Garnier (Ecole Polytechnique, Lusenn) to develop a climate-extended risk model (the CERM) to assess how forward looking climate risks affects the borrower’s default risk in lending portfolios.

Green RWA, along with its partners, proposes first pilot programs on sample portfolios, specifically targeted to corporate banking. The aim is to evaluate climate risk through this innovative CERM framework and to put in place usage of climate metrics and related quantitative disclosures.

 

With our experienced partners, combining banking project, data and reporting expertise, we work on following use cases:

  • Loan origination and monitoring:

    • to include climate risk in the decision process when entering new loans

    • to quantify exposure against climate limits

  • Climate stress tests exercises:

    • Self-assessments

    • Supervisory

  • Calculation of other metrics

    • Indicators for the purposes of strategy-setting and risk management

    • Internal economic-climate capital

  • TCFD Risk Management and Metrics/Target pillars

 

And also:

  • To fast-track the development of specialized skills and expertise:

    • Via a cartography of climate data

    • Via the knowledge of classifications, high stakes, low stakes sectors​

    • Via the assessement of new technologies

  • For case studies towards an internal or external audience, in support of strategy and communication.

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The CERM principles and objectives:

  • Is an extension of Basel credit models (ASRF)

  • Takes as an input the forward looking term structure of economic and climate risks

  • Helps banks to address the complex challenge of new climate risk factors with scarce data

  • Models dynamic credit/climate ratings, loans rebalancing and distribution across groups with homogeneous climate profiles

  • Is designed to estimate the total long term credit cost: the expected cost of risk and the capital charge

  • Provides a mechanism to optimise banks' climate strategy by:

    • Financing adaptation and mitigation plans of existing clients

    • Rebalancing towards greener borrowers and greener collateral.

From the CERM outputs we detect tail scenarios that result in massive counterparty defaults and unexpected losses. Reverse stress test allows us to investigate impacts from such paths. Finally we perform a number of what-if scenarios to further explore the impacts.

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