Our client is a European commercial bank with a diverse corporate lending portfolio. As regulatory expectations regarding Environmental, Social, and Governance (ESG) standards continue to evolve, the bank wanted to better understand its exposure to climate transition risks within a key strategic portfolio. The goal was to assess how potential shifts in environmental legislation might affect the financial stability of its clients and, by extension, the overall health of the bank’s loan book.
A common challenge within the climate risk management landscape is the lack of standardized, client-level emissions data, especially for non-listed firms. To bridge this gap, the bank needed a practical and innovative methodology capable of translating macroeconomic climate reference scenarios (such as those from the NGFS) into useful financial insights. Additionally, this approach had to align with the expectations of European regulatory bodies, specifically integrating the best practices outlined in the EBA Guidelines on ESG Risk Management and ESG Scenario Analysis.
In close collaboration with the client, RiskSphere designed a tailored climate risk model. First, a comprehensive resilience baseline was established by pairing foundational client financial information with industry-benchmark greenhouse gas intensity estimates. With this baseline in place, we integrated credible reference scenarios to reasonably simulate the potential costs of future transition risks.
We then applied a two-tiered assessment framework to evaluate the portfolio:
Client Financial Impact: We analyzed core business fundamentals to understand how transition-related costs might reduce a borrower’s operating liquidity under different climate policy scenarios.
Portfolio Risk Translation: Using regulatory stress-test parameters, we modelled how these individual financial pressures could translate into broader risk metrics for the bank, projecting potential shifts in default probabilities and impairment levels over a multi-year period.
The project provided the bank with a clear view of portfolio resilience across different client segments. This established framework now actively supports the bank's regulatory dialogue while simultaneously highlighting key business risks and opportunities. For instance, it enabled the bank to identify specific client groups that would benefit from targeted financing to support their decarbonization journeys.
Ultimately, the implementation successfully translated recent EBA guidelines into actionable insights for a strategic portfolio. RiskSphere is proud to have helped this client turn abstract climate scenarios into a practical tool for both risk management and strategic planning.