Climate Risk Stress Testing Deployment
Regional bank, UAE
The bank needed to assess the financial impact of carbon emissions on its borrowers in line with CBUAE guidance, and required a solution covering data preparation, validation, modelling and output.
Scope of work
Data template specified covering sector, revenue, EBITDA, market value, debt, credit rating and Scope 1, 2 and 3 emissions, provided to the model user with transformation tools built in and discrepancies highlighted for resolution before the run.
Proxy construction built in for missing company data:
- Market value mapped using average industry revenue multiples in the region, or book value
- Carbon emissions mapped using industry-level multipliers representing CO2 released per million USD of output across Scope 1 and Scope 2 fuels
- Additional CBUAE and dataset-specific transformations accommodated
Validation module managing loading after upload and reporting any failures in a log for the user to correct and resubmit, so the model runs only on data that has passed its checks.
Stress testing chain initiated once validation passes, running the transition risk bottom-up analytics model:
- Regional carbon prices varying by climate scenario applied to reported emissions to calculate a carbon cost
- That cost factored into EBITDA and then into total asset value
- The reduction in asset value fed into the bank's internal rating model to produce projected ratings, PD and LGD
Output and enhancement, with a detailed results page produced on the interface and improvements made to the CSV output generation process and the interface through deployment.
Outcome and value
- Climate transition risk expressed in the credit metrics the bank already uses.
- Analysis producible by the bank's own users on its own data.
- Output aligned to CBUAE guidance and formats.
- A repeatable process rather than a one-off exercise.