Vivid’s Climate Risk Toolkit uses a scenario-driven approach to assess the impact of climate change risk on financial assets
It is increasingly urgent for financial institutions to understand and incorporate climate risk into their way of doing business. The Taskforce for Climate Related Financial Disclosure (TCFD) and the Network for Greening the Financial Sector (NGFS) have outlined the potential for climate change to disrupt financial markets, and have encouraged financial institutions to respond adequately. The Climate Risk Toolkit enables financial institutions to respond to this need, and to integrate climate risk into their governance, strategy, risk management and reporting. It uses a suite of climate, economic and financial models that allow clients to estimate the climate risk exposure of their financial assets under different scenarios, and to apply those insights to their decision making. The toolkit covers over 20,000 listed companies, and associated corporate bonds, as well as real estate, infrastructure, private equity, major commodities and sovereign bonds for major economies.
The Toolkit offers clients the ability to cater the analysis to their needs, and to disaggregate impacts across a variety of impact channels.
The toolkit incorporates numerous exposure channels including changes in fossil fuel and mineral demand, cleantech deployment, carbon prices, labour and agricultural productivity, and the incidence of extreme weather events. Alongside exposure channels, economic responses (emissions abatement and adaptation to physical risks), and competitiveness implications are factored in. This produces a detailed picture of climate risk impacts at the asset class, subclass and asset level, as shown in the IPR FPS equity results. The Climate Risk Toolkit also offers clients the ability to create bespoke scenarios that best reflect their views given policy, technology and physical uncertainties. Our scenario modelling has been developed in partnership with leading academic institutions, offering unprecedented sophistication and flexibility. This was involved in the development of the IPR Forecast Policy Scenario.
The Toolkit produces insights on climate transition-related financial risks for investors, asset managers, banks, insurers, private equity firms, and regulators.
The Toolkit has been used by a variety of financial institutions globally. Although much of our work is confidential, among our publicly announced projects, Vivid has worked recently with Invesco, HSBC Global Asset Management, and Lloyds of London, as well as with various industry-leading groups such as the PRI, IIGCC, ClimateWise, ACSI and UNEP-FI. The toolkit is used by clients to:
TCFD disclosure and temperature alignment: analysing existing portfolios to provide financial risk metrics and a temperature alignment metric for public reporting
Regulatory stress-testing for banks and insurers: analysing loan books and other holdings in line with the Bank of England’s 2021 Biennial Exploratory Scenario
Sophisticated scenario analysis for risk management: using bespoke climate scenarios to better understand the probability distribution of risk, including different policy, technology and physical risk pathways over time