Ortec Finance’s Climate MAPS, Climate PREDICT, and Climate ALIGN were recognized as important tools for climate risk assessment in the latest United Nations Environment Programme Finance Initiative (UNEP FI) climate report The Climate Risk Landscape.
“Developing a tool or methodology that can provide a robust assessment of climate-related risk, whether transition or physical, is a considerable undertaking”, UNEP FI says in The Climate Risk Landscape. To supplement financial institutions’ search for a tool to assess climate risk and its consequences, UNEP FI has published an overview of 18 transition and physical risk analytics tools. The set of service providers that were listed and reviewed include the principal commercially available methodologies.
UNEP FI also hosted a webinar outlining the 18 featured climate risk tools.
Transition and Physical Risk
Within the report, UNEP FI published two comprehensive tables, which provide an overview of both transition risk and physical risk assessment tools and analytics. The comprehensive report highlights Climate MAPS as a material tool for both types of climate risks, while Climate PREDICT enables a deep-dive into climate-attributable extreme weather risks. Our Climate ALIGN solution provides financial institutions a temperature score that measures portfolio alignment to the Paris Agreement. The tool utilizes the open-source SBTi-Finance tool, which Ortec Finance built on behalf of the Science-Based Targets initiative in 2020.
UNEP FI also perceives that transition and physical risk methodologies are increasingly being combined in order to provide financial institutions with an overall picture of climate-related risks for each scenario and highlights that “some providers have already achieved this in-house, such as Ortec Finance”.
UNEP FI writes in its report that, up until now, many models have relied on one scenario type but the assessed providers are moving away from a single-scenario approach. In 2020 the Central Banks and Supervisors Network for Greening the Financial System (NGFS) developed a set of 3 scenarios:
- Orderly: Early, ambitious action to a net zero CO2 emissions economy
- Disorderly: Action that is late, disruptive, sudden and / or unanticipated
- Hothouse World: Limited action leads to a hothouse world with significant global warming and, as a result, strongly increased exposure to physical risks
Ortec Finance’s 3 transition pathways are similar to the NGFS scenario set, highlighted by UNEP FI, providing an Orderly and Disorderly Paris-Aligned Transition Pathways and a Failed Transition Pathway, equivalent to a ‘hothouse’ world. To assess the macroeconomic consequences (including GDP, inflation and sectoral GVA) of these scenarios, Ortec Finance has collaborated with Cambridge Econometrics. Ortec Finance has incorporated their mature financial modeling with Cambridge Econometrics’ robust econometric model E3ME, that covers countries, sectors and asset class risk return expectations, for a top-down approach.
In the report, UNEP FI writes that “top-down approaches capture the networked effects of interacting climate risk drivers, including policy, technology and physical risk more readily. Ortec Finance’s Climate MAPS is an example of this approach”.
UNEP FI advises that “methodologies should all take into account carbon lock-in or ‘expected greenhouse gas emissions’, otherwise approaches that only look at present carbon emissions will ignore the risk of surpassing carbon budgets”. Applying forward-looking climate risk assessment and alignment tooling has been identified by UNEP FI as an important issue that can be integrated a number of ways. We were thrilled to see that the methodology used by Ortec Finance’s Climate and ESG Solutions is one of the methods highlighted and featured by UNEP FI.