• Yugal Yadav, Senior Director of Product at OakNorth


• 19.10.2023 12:30 pm
#fintech #data

Climate change is having a significant and wide-ranging impact on businesses across various industries. These impacts predominately come in the form of physical risks, including extreme weather events, such as floods, forest fires, and cyclones, and transition risks, which include increased regulatory changes, such as governments implementing stricter regulations related to emissions, reporting, and sustainability.

As a result, it is imperative for banks to stay well-informed about the changing climate science landscape and policy shifts, and continuously evaluate and refine their strategies as new information becomes available and the comprehension of climate change advances. However, regulators have consistently highlighted the limitations of existing tools employed by banks for conducting thorough assessments of climate-related risks. Fintech companies, which are at the forefront of harnessing technology and data, have the potential to bridge this gap by enhancing the accuracy and granularity of climate risk evaluations.

Fintechs can help banks collect and integrate a wide range of environmental, social, and governance (ESG) datasets, both conventional such as financial risks and exposures, and non-traditional such as weather patterns, satellite imagery, hazard forecasts, emissions data, and sustainability reports. By incorporating these variables into their risk assessments, banks can gain a comprehensive understanding of their exposure and vulnerabilities, allowing them to devise effective risk mitigation strategies. Fintech firms also employ advanced analytics and machine learning techniques to analyse the vast amounts of ESG data in real-time to identify patterns, predictive indicators, and correlations related to climate risks. 

In addition, fintech solutions offer sophisticated risk assessment tools that consider environmental factors, enabling financial institutions to effectively assess the potential impact of climate-related events on their portfolios. For example, fintechs can empower traditional banks to model the impact of different climate scenarios on their portfolios. This involves stress-testing portfolios under various adverse climate-related events, such as extreme weather incidents, carbon pricing, or regulatory changes. These simulations enable banks to adjust their strategies promptly, adapt to changing climate conditions, and ensure their financial stability. Fintechs can also help banks develop ESG scoring systems and reporting frameworks to quantify and communicate climate risk exposure. This information can be shared with stakeholders, including investors, regulators, and the public to demonstrate their commitment to sustainable finance. 

At OakNorth, we leverage our vast repository of data to support commercial lenders in addressing the growing regulatory focus on evaluating, measuring, and reporting climate-related risks and financed emissions. Our ON Climate solution is enabling lenders to run bottom-up climate scenario analysis across their commercial lending portfolio. OakNorth’s climate scenarios stress-test portfolios over various timeframes, including policy target terms. Using ON Climate solution, banks can understand climate risks at the borrower, industry, sector, and portfolio level - with climate scenario-adjusted financials providing input to banks’ risk rating / PD models. This helps banks assess performance across different periods and determine the right-mix of borrower profiles consistent with their strategic risk goals. 

In conclusion, climate risks have shifted from being a distant threat to becoming a central element of lenders' risk management strategies. Incorporating fintech solutions for real-time climate risks assessment can help banks identify, understand, and manage their exposure to climate risks more effectively, contributing to a more sustainable and responsible financial sector. As the fintech sector advances, we anticipate the development of increasingly sophisticated tools and strategies, which will further accelerate the transition to a low-carbon economy. Commercial banks that adopt these innovations today will be well-prepared to address future challenges associated with climate change.