Challenges in Climate Metrics for Financial Institutions

🚀🌿 Exploring the FSB's new Nature-Related Financial Risk Stocktake The Financial Stability Board (FSB) just released a comprehensive stocktake on nature-related financial risks, providing valuable insights for the sustainable finance community. Here are some key points: 1. Diverse Stages of Evaluation: Financial authorities are at various stages of evaluating the relevance of biodiversity loss and other nature-related risks as financial risks. While some have recognized these as material financial risks, others are still monitoring international developments due to data gaps and the need to prioritize climate risks. 2. Data and Modelling Challenges: A major challenge identified is the difficulty in connecting underlying nature risks with financial exposures. There is a significant need for improved data and modelling to translate estimates of financial exposures into tangible measures of financial risk. 3. Regulatory and Supervisory Work: The regulatory and supervisory initiatives related to nature-related financial risks are in the early stages globally. There are diverse approaches across jurisdictions, with some authorities already implementing initiatives to promote firm-level disclosures and capacity-building efforts. 4. Analytical Frameworks: The report categorizes nature-related risks into physical and transition risks, similar to climate-related financial risks. Financial institutions are exposed to these risks through their investments and financing activities, but more work is needed to develop holistic approaches that consider the interdependencies between climate and nature-related financial risks. 5. Capacity Building and International Coordination: The report emphasizes the importance of international cooperation and capacity building to manage nature-related financial risks effectively. Examples include initiatives by the Network for Greening the Financial System (NGFS) and the Taskforce on Nature-related Financial Disclosures (TNFD). #SustainableFinance #NatureRisk #FinancialStability #FSB #Biodiversity #ESG #NatureDisclosure

Last month, I talked to 40+ finance professionals working across the climate capital stack. Here are the most pressing challenges, opportunities, and insights that emerged: ⚙️ Hard Problems - Even proven tech struggles to scale: EV chargers and energy storage are mature technologies, but their merchant risk makes traditional project finance models break down. - First-of-kind (FOAK) projects remain fundamentally hard: LPO funding is likely ending, and few alternatives exist. The good news? Several new funds are targeting this gap - worth watching closely. 💬 Communication Challenges - The climate finance ecosystem speaks multiple languages: VCs talk TAM and dreams, project finance talks DSCR, insurers talk actuarial risk. Getting deals done requires translating between all of them. - Risk/reward misalignment plagues deals: Startups and VCs chase upside, but deployment partners bear downside risk. This fundamental tension delays scaling. - Climate still fights for credibility: "Senior stakeholders don't even understand Scope 1, 2, and 3," one banker shared. "Anything labeled climate gets immediately written off as concessionary." 📚 Knowledge Gaps - Deal structures remain bespoke: While startups have SAFEs and mature sectors have established project finance precedents, new climate technologies lack standardized financing models. Knowledge sharing between successful deals is almost non-existent. - The "finance-ready" paradox: Capital exists, but most projects aren't structured to receive it. Companies often start thinking about project finance years too late. 🌡️ Climate Risk - Insurance is the canary: Companies are pulling out of high-risk regions and wildly hiking rates. - Markets haven't caught up: This risk repricing isn't reflected in broader valuations...yet. - This disconnect is both terrifying and the biggest opportunity in the space. 🔥 Hot Topics - Nature & Biodiversity: Hard to quantify but drawing serious LP interest - Resilience & Adaptation: Finding new momentum as climate impacts accelerate and we prepare for a "don't-say-climate" presidency - Data Centers: Energy use + AI boom = unavoidable focus - Geothermal: Rising star for baseload power, especially post-Fervo - Global Standards: EU's CSRD and Carbon Border Adjustment Mechanism will reshape supply chains regardless of US policy, with real ramifications for manufacturers in Asia and beyond. These conversations revealed just how hard—but also how essential—it is to align incentives, build trust, and bridge knowledge gaps across the climate finance ecosystem. As Eugene Kirpichov just wrote—we need systems thinking if we're going to tackle these wider problems. Anything missing here? What's on the top of your mind for 2025?

𝗖𝗹𝗶𝗺𝗮𝘁𝗲 𝗥𝗶𝘀𝗸 𝗶𝗻 𝗕𝗮𝗻𝗸𝗶𝗻𝗴: 𝗪𝗲 𝗡𝗲𝗲𝗱 𝗠𝗼𝗿𝗲 𝗧𝗵𝗮𝗻 𝗧𝗿𝗶𝗮𝗹 𝗥𝘂𝗻𝘀 Glaciologists know the world can change fast—and financial systems are hardly immune. While early ice core data hints at abrupt temperature shifts, today’s climate data shows we are experiencing those shifts at a rapid, nonlinear pace. Banks, however, are still treating climate risk as a hypothetical. Last year, the Federal Reserve released a cautious summary of a climate "scenario exercise" by six major U.S. banks, gauging their ability to handle extreme climate risks. The result? Not much assurance. This scenario exercise was intended as an “early exploration,” yet the process exposed glaring gaps. Banks struggled to evaluate risks independently, leaning heavily on third-party vendors, and faced issues of “limited data, lack of back-testing, nonlinear risks, and time constraints." Their models, in short, are black boxes—and the data? Insufficient. What’s missing is also the heart of the matter: data on building locations, construction, insurance costs, and climate shocks on communities. This exercise isn’t about financial losses, but about our thin readiness for climate upheaval. Our federal leadership must insist on sharper, rigorous assessments. The climate doesn’t wait for comfort zones; neither should we. This is the beginning of a massive, multi-layered effort, requiring immediate action to make sure financial models can withstand a climate reality that science tells us is coming quickly. As glaciologists would remind us, societies have been swept away by climate changes before—without the capacity to plan. Today, we do have that capacity. It’s up to us to use it.

Scenarios for Assessing Climate-Related Risks: New Short-Term Scenario Narratives The use of climate scenario analysis as a tool has become widespread, but a major gap exists in short-term scenarios that explore near-term risks, economic volatility, and potential systemic vulnerabilities. The need for short-term scenarios for climate scenario analysis has grown rapidly in recent years as financial institutions acknowledge the necessity of integrating climate commitments into their short-term planning strategies and addressing climate risks in the near term. However, the majority of currently available climate scenarios focus on long-term perspectives to explore climate risks, with only a limited number taking the short-term into account. This report, and the accompanying short-term climate scenarios tool, aim to bridge this gap in climate scenario analysis by identifying short-term scenario narratives for financial use. It serves as a guide to help financial institutions understand the implications and drivers of a range of short-term shocks. This report is accompanied by an Excel-based visualization tool with new scenarios that explore a set of macroeconomic, transition, and physical risk shocks, allowing users to explore combinations of these three types of shocks. Developed for asset managers, insurers, bankers, and investors. This report has been produced by United Nations Environment Programme Finance Initiative (UNEP FI) Risk Centre, a new virtual hub that is integrating resources to help UNEP FI’s members tackle sustainability risks, in partnership with the National Institute for Economic and Social Research. 🛠 Download the report and tool free here: https://lnkd.in/dC2aJij8 #scenarios #climate #climatescenarios #economics #climaterisk

Just released, 57 banks in the United States could face material financial risk as defined by the SEC. That's what the First Street 11th National Risk Assessment, Portfolio Pressures found. Full download here: https://lnkd.in/eMAs_tGv Using the First Street Correlated Risk Model, we identified the potential climate risk to the loan portfolios of all banks in the United States. Below are the key take aways: 1. Importance of Geographic Diversification: Financial institutions, particularly smaller banks, face higher risks with geographically concentrated portfolios, underscoring the need for strategic diversification to mitigate climate-related financial losses. 2. Comprehensive Climate Scenario Analysis: Effective climate risk assessment requires comprehensive scenario analyses that account for the interactions between different climate perils across various regions and timeframes. 3. Regulatory Challenges: Current regulatory frameworks do not mandate climate scenario analyses for smaller banks, creating a significant gap in climate risk oversight and leaving these institutions unprepared for future climate impacts. 4. Impact on Communities and Property Values: Climate events not only cause immediate losses from physical damage but also have long-term effects on property values and the broader economy, making comprehensive risk assessment crucial for financial stability. 5. Advancement in Risk Modeling: The First Street Correlated Risk Model (FS-CRM) is the climate risk financial modeling (CFRM) tool for a complete understanding of climate risk through the integration of correlations among multiple perils, with the precision of property-specific damage estimates and more accurate projections through the integration of forward looking climate data, a significant industry advancement. all of which allows for a clearer picture of potential financial impacts. 6. Strategic Risk Mitigation: By using advanced models like the FS-CRM, stakeholders can better understand and mitigate the risks associated with climate change, enhancing resilience in both the financial sector and the communities they serve. Reach out if you would like to learn more.