The Climate Risk Tool Landscape

Financial institutions are working with a growing number of tools and providers to obtain the climate skills, information, and outputs required to assess their climate risk. This report from the United Nations Environment Programme Finance Initiative (UNEP FI) defines a set of criteria for evaluating these tools and offers case studies of the services offered by 15 third-party providers. It also makes a series of recommendations on how these tools might be improved.

Climate risk tools are used by both financial regulators and the entities they supervise to assess climate-related risks to institutions and to the financial system.

Driven by jurisdictions that have announced mandatory climate risk disclosures, larger players are developing their capabilities by acquiring smaller tool creators, the study finds. Transition and physical risk methodologies are being combined, while new physical risk data sources are improving the granularity of assessments. The analysis also finds a growing interest in machine learning, AI and remote sensing data sources, with new transition risk scenarios and a greater focus on the transition to net zero.

The report says that financial institutions require tools to be “decision-useful, disclosure-useful, and commitment-useful”, with outputs suitable for use in climate stress testing, TCFD reporting and other sustainability disclosures. Essentially, the tools work backward from reporting expectations in order to produce outputs that are likely to align with reporting standards.

Recommendations offered in the report include improving physical risk, transition risk and emissions data to offer a more holistic capturing of potential impacts from a wide range of interrelated climate-related phenomena. Improvements in tool outputs to help users better understand the implications and applicability of results are also advised, along with incorporating different hazards, tipping points, and tail-risk events into model assumptions.

In general, users of the tools examined sought “additional realism”, accounting for the complexity of both the climate science and policy response, and expanding to include second and third order effects.

This study is a supplement to the UNEP FI’s 2021 Climate Risk Landscape report which summarised key developments across third-party climate risk assessment providers, mapping climate-related financial risk assessment methodologies to the changing regulatory landscape.