Bank's Climate Risk Strategies Based Around Tipping Points

The Intergovernmental Panel on Climate Change (IPCC) has issued a stern warning to the world about the dangers of exceeding the 2°C global warming limit. Future scenarios, which present a choice of options for governments, financial organizations, and other decision-making institutions, are used to investigate the repercussions of climate change risks. The IPCC's Fifth Assessment Report (AR5) proposed a new approach to scenario development, referred to as Representative Concentration Pathways (RCPs) because they cover a wide variety of possible radiative forcing scenarios.

Radiative forcing, measured in watts per square meter (W/m2), is the increased heat that the lower atmosphere will retain as a result of increasing Greenhouse Gases (GHGs).

The complexity of humanity’s possible future emissions has been reduced to just four representative pathways:

• The RCP 2.6 approach is the most ambitious. Radiative forcing is 2.6 W/m2 2100 as a result of this. As a result of active carbon dioxide removal from the atmosphere, emissions peak early and subsequently, fall. It depicts a scenario in which GHG emissions have drastically decreased.

• The RCP8.5 is a radiative forcing pathway that results in 8.5 W/m2 2100. It is a scenario in which GHG emissions continue to climb unabated, resulting in a worldwide average temperature rise of 4.3°C by 2100.

• The RCP6.0 pathway results in radiative forcing of 6.0 W/m2 2100. It uses a variety of tactics to reduce GHG emissions to stabilize total radiative forcing.

• The RCP4.5 scenario is comparable to the lowest-emission scenario. It's a path that results in 4.5 W/m2 2100 radiative forcing. This is the lower end of the range, where certain effects are felt but maybe 'lived with' with careful adaption.

Potential impact of higher temperature on the environment and humans

Storms, heat waves, floods, and droughts are all worsening as a result of climate change crisis. Warmer temperatures create an atmosphere that can collect, hold, and release more water, causing weather patterns to shift in a way that makes wet places grow wetter and dry areas get drier.

Humans, on the other hand, are susceptible to heatstroke and dehydration, as well as cardiovascular, pulmonary, and cerebrovascular illness, when exposed to excessive heat. People living in northern latitudes are less prepared to deal with intense heat, which makes them more vulnerable.

With the governments’ transition plans in place to ensure physical, energy, and food security, banks must also provide credit facilities to ensure financial security of their institutions and the financial system as a whole. This can be achieved by banks with a regime governed by:

• Banks must retain accounting capital against conservatively expected future credit losses under IFRS9/CECL.
• The Basel 3/Dodd Frank rules emphasize the link between credit risk, liquidity, and financial stability.
• Liquidity stress tests, which require banks to examine their internal liquidity under hypothetically challenged economic situations and hold capital to weather the storm.

Banks must use the RCPs when creating economic scenarios to quantify climate change risks associated with investments in order to provide sustainable funding.

GreenCap's Risk as a Service (RaaS) technology assists banks in determining their potential to create smart, climate-based scenarios, allowing them to incorporate climate risk into their present framework and policies.