EMDF Co-developed Tools Highlighted in UNEP Report

The report Environmental risk analysis by financial institutions – a review of global practice published recently by the United Nations Environment Programme (UNEP) and the Cambridge Centre for Sustainable Finance aims at providing input for the G20 Green Finance Study Group (GFSG) which reports to the G20 Finance Ministers and Central Bank Governors. Presenting a global stock take of tools and techniques that financial institutions are developing to analyze environmental risks, the researchers mention several environmental risk management tools co-developed by the Emerging Markets Dialogue on Green Finance.

“In our work, we have been experiencing a growing awareness of the financial sector for environmental and climate-related risks”, states Yannick Motz, who heads EMDF’s green finance activities “The lack of adequate data and tools as well as opportunities is, however, still an impediment for financial institutions to address and integrate such risks into their decision-making processes. Jointly with our valued partners, mostly financial institutions, we strive to contribute to filling this gap by co-creating respective tools, opportunities and capacities.” Likewise, the GFSG has been established under the Chinese G20 presidency to analyze options on how to enhance the ability of the financial system to mobilize private green investment, thereby facilitating the green transformation of the global economy. The study group asked the Cambridge Centre for Sustainable Finance to lead the research on risk analysis, one of five research areas of the GFSG.

The work by the Emerging Markets Dialogue on Finance (EMDF) has been recognized threefold in the report: First, the Corporate Bonds Water Credit Risk Tool is illustrated in a case study. The tool provides credit analysts and portfolio managers with a systematic and practical approach to integrate corporate exposure to water scarcity into standard financial models used in corporate bond credit valuation. Secondly, the report mentions the ongoing pilot project on Environmental Stress Testing, which aims to develop and test an analytical framework and model that allow banks to assess the potential impact of drought events on the performance of their corporate loan portfolio. Finally, the work on Natural Capital & Finance in India is presented as an example of engaging with Indian financial institutions to enhance their capabilities in understanding, measuring and managing the bank’s exposure to natural capital risks. “Seeing that the GIZ’s efforts of the last years are reflected in the G20 process is a very encouraging signal for all of us”, says Yannick Motz.