A Large Middle Eastern Bank Meets Strategic Climate and Investment Goals via a Broad Single Provider Solution

Climate change induced by greenhouse gas (GHG) emissions poses a serious threat to the planet. As a result, it has become one of the main topics of discussion among governments and financial regulators due to its potential to slow economic growth, reduce employment and undermine the stability of financial markets [1].

The United Arab Emirates (UAE) has been taking a leading role in promoting decarbonization initiatives globally and locally. From announcing 2023 as the UAE year of sustainability, to hosting United Nations Climate Change Conference (COP28) later in 2023 in Dubai, demonstrates the government's clear commitment to fast-track the energy transition and accelerate emissions reductions to limit global warming to 1.5 degrees Celsius by 2050 [2] as initially agreed upon back in 2015. To build consensus amongst the different stakeholders and drive climate actions, The Central Bank of UAE released comprehensive guidelines for the banking industry related to stress testing its corporate exposures against climate transition and physical risks [3].

Members of the risk management and sustainability teams at this large bank are responsible for measuring and managing the bank’s exposure to environmental threats. This includes undertaking stress tests of the bank’s loan portfolios to meet regulatory requirements. The primary goal is to execute several Network for Greening the Financial System (NGFS) scenarios and estimate the impact at borrower level (bottom-up) or at the economic sector level (top-down) basis for climate-sensitive sectors. As the result, the bank must measure, analyze and report climate scenario-adjusted credit risk scores and their associated probabilities of default using Climate Credit Analytics (CCA) award winning solution [4], as well as being an early adapter and a market leader on the ESG front.

Pain Points

The bank wanted to select a sophisticated approach to meet regulatory requirements for stress testing its loan portfolios and build a top-quality climate database to support related initiatives across the bank.

The Risk team needed to stress test the bank’s loan portfolios to uncover any potential vulnerabilities related to financed emissions. At the same time, a number of groups throughout the bank wanted to build a robust climate database for firm-wide access to support a broader range of risk-related issues. Both groups needed high-quality data for their initiatives, and the Risk team took the lead on identifying a well-recognized firm that could provide:

• A single source of broad and reliable environmental data for public companies.
• Estimated emissions for small- and medium-sized enterprises (SMEs), where this information is typically not reported.
• The ability to run a climate stress analysis on a large number of companies within a portfolio.
• Information on openings, closings and acquisitions of branches.
• A sound methodology to evaluate transition paths to net zero under different climate scenarios.
  
  

The team began discussions with S&P Global Market Intelligence (“Market Intelligence”) to learn more about the firm’s offering.

The Solution

The client issued a request to proposal (RFP) to address the bank's strategic climate and investment goals. Market Intelligence authored a deep-dive proposal supported by numerous demos, product and subject matter expert sessions, and other proofs-of-concept. S&P Global Market Intelligence was able to present a solution that solved many of the customers’ challenges.

Our Sustainability Data Suite

The sustainability datasets help clients accelerate their alignment with global climate and sustainability goals. Our comprehensive coverage across global markets combined with in-depth sustainability intelligence provides financial institutions an unmatched level of clarity and confidence to successfully navigate the transition to a sustainable future. Our data and well-informed point of view on critical topics like energy transition, climate resilience, positive impact and sustainable finance allow us to go deep on the details that define the big picture so customers can make decisions with conviction. These enabled:

	Better understanding of carbon footprint	Trucost Environmental Data provides robust, quality-checked, and standardized environmental data on more than 17,000 public & 2.5 million private companies globally, with historical data dating back to 2005. The data includes: greenhouse gas (GHG) emissions for Scope 1, 2, and 3; natural resource use; land, water, and air pollutants; water use and intensity; waste disposal and intensity; revenue generated from each sector of a company's operations; and, fossil fuel reserves, power generation capacity, and associated carbon for approximately 1,200 companies
	Assessment of physical risks	Physical Risk Analytics assesses 24,600+ companies’ exposure to physical risk at the asset-level based on a database of over 3 million+ assets. We cover eight key climate change physical hazards (Extreme Heat, Extreme Cold, Coastal Flooding, Wildfire, Drought, Fluvial Flooding, Tropical Cyclone and Water Stress) under four scenarios (Low (SSP1-2.6), Medium (SSP2-4.5), Medium-High (SSP3-7.0) and High (SSP5-8.5) for eight decades from the 2020s to the 2090s. We provide physical risk scores from 0 to 100 to each asset based on location and company and asset level financial impact metrics reflecting the value of financial costs/losses projected due to changing climate hazard exposure.
	Tracking a company's progress on the Paris Agreement goals	The Paris Alignment Dataset enables to track their portfolios and benchmarks against the goal of limiting global warming to below 2°C from pre-industrial levels, as well as other climate change scenario outcomes. Based on their GHG trajectory (transition pathway assessment) and using the SDA-GEVA approach recommended by SBTi, our Trucost Paris Alignment dataset assesses company-level alignment with the Paris Agreement goal at a 2100 time-horizon based on emissions trajectory between 2012 to 2030.
	Gauging ongoing sustainability efforts	S&P Global ESG Scores give financial institutions the transparency and flexibility to drill down into three underlying Environmental, Social and Governance & Economic Dimension Scores, with an average of 23 Criteria scores. Providing up to 1,000 data points per company per methodology year across 13,000 companies, the S&P Global ESG Scores offers enhanced transparency on corporate sustainability performance, enabling market participants to access high quality, granular information to support their decision making and reporting.

Our Climate Scenario Analysis / Climate Stress Test Solution

The award winning Climate Credit Analytics is a climate stress‑testing framework and scenario analysis model suite, which was launched in 2021. Climate Credit Analytics makes the critical link between climate change and credit risk by translating climate scenarios into drivers of financial performance (e.g., production volumes, fuel costs and capex spending) tailored to specific industries. These drivers are then used to forecast complete company financial statements under various climate scenarios, including those published by the NGFS, a group of over 120 central banks, financial authorities, and observers [5].

Developed through a collaboration between Market Intelligence and Oliver Wyman,[6] Climate Credit Analytics includes an automated capability to evaluate more than 2.2 million[7] public and private companies, as well as the ability for users to input proprietary information to expand this analysis. The solution covers five carbon-intensive sectors (Airlines, Automotive, Metal & Mining, Oil & Gas and Power Generation) and provides a generalized approach for all other sectors to complete the portfolio analysis. Climate Credit Analytics leverages Market Intelligence’s proprietary datasets and capabilities, including financial and industry-specific data, sophisticated quantitative credit scoring methodologies and the aforementioned company-level environmental and physical risk datasets that powers many of S&P Global’s sustainability solutions.

Key Benefits

Members of the Risk team were impressed with the combination of Market Intelligence’s data resources and climate scenario analysis/stress testing analytics. The team’s colleagues in other areas of the bank also saw immense value in having one well-respected provider of an extensive set of environmental capabilities. Market Intelligence was clearly able to present a solution that solved many of the challenges.
A decision was made to utilize the offerings, given our key differentiators:

• Breadth: One-stop-shop for ESG scores, environmental & climate data, and climate credit analytics with hundreds of data points on thousands of public and private companies and sovereign debt issuers
• Quality: A top-quality environmental database backed by the unparalleled reputation of S&P Global to support related initiatives across the bank
• Depth: A sophisticated methodology to translate complex climate scenarios into drivers of financial performance to carry out stress tests, including sophisticated quantitative credit scoring via Climate Credit Analytics
• Integration: Differentiated datasets across S&P Global Market Intelligence and other divisions that are embedded in Climate Credit Analytics to provide sector specificities and differentiation, which are essential to the analytical approach
• Transparency: Ability to view, override and drill-down variables used in the models with full output of financial statements to understand changes in profitability, cash flows and a corporate’s credit risk alongside detailed documentation to explain the approach
• Expert bench: Ongoing support to thoroughly understand the underlying data and methodologies with subject matter experts in sustainability datasets and Credit Risk
  

With these offerings, the commercial bank was able to:

• Establish a Corporate Strategy: Quantify financed emissions and set targets in alignment with the Partnership for Carbon Accounting Financials (PCAF).
• Formulate a Plan to Achieve Targets: Empower front-line teams with the data and insight to help their clients achieve net-zero targets.
• Quantify Risks with Confidence: Conduct climate stress-testing and scenario analysis to figure out impacts on credit risk in compliance with regulatory and voluntary disclosure requirements.
  

Click here to explore some of the datasets mentioned in this Case Study.