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Understanding the Impact of Climate Change on a Bank’s Loan Portfolio

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Understanding the Impact of Climate Change on a Bank’s Loan Portfolio

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Climate change means that we may face more frequent or severe weather events, such as floods, droughts, and typhoons if action isn’t taken. These events bring physical risks that can have a negative impact on businesses and the overall economy. At the same time, steps taken to help alleviate climate change can result in transition risks, as carbon taxes and other policies add new operating costs. There is a complex interplay between physical and transition risks that can impact the operational stability, creditworthiness, and financial performance of firms.

The Financial Stability Board established the Task Force on Climate-related Financial Disclosures (TCFD) to develop recommendations for more effective management of climate change risks in financial markets. TCFD advises the use of scenario analysis to assess climate risks, and asks banks to voluntarily reveal the results in annual filings, along with the metrics and processes used to conduct the analysis.

This major commercial bank wanted to respond to TCFD’s transparency measures by taking steps to better understand the impact of climate change on its loan portfolio.

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