Climate‐related credit risk: Rethinking the credit risk framework
| Published date | 01 March 2024 |
| Author | Helena Redondo,Elisa Aracil |
| Date | 01 March 2024 |
| DOI | http://doi.org/10.1111/1758-5899.13315 |
Global Policy. 2024;15(Suppl. 1):21–3 3.
|
21
wileyonlinelibrary.com/journal/gpol
1 | INTRODUCTION
Climate change has become a global publi c policy
priority (BCBS, 2020; BoE, 2 021a; FSB, 2022) after
scientists repeated warnings about its catastr ophic,
irreversible and unprecedented consequences
(IPCC, 20 18, 2022). The Paris Agreement turns the
fight against climate change into a worldwide de -
carbonisation effort (UNFCCC, 2015), representing
a point of no return for the transition to a carbon- free
economy (Van Coppenolle etal.,2023).
Climate- related financial risks entail ‘the potential
risks that may arise from climate change or from ef-
forts to mitigate climate change, their related impacts,
and their economic and financial c onsequences’
(BCBS,2021a : 4). The impacts of climate- related risks
(CRR) on banks may consist of reputational risks for
being connected to heavy- polluters (Weber,2005), po-
tential regulatory burdens (Battiston et al.,20 21) and
a significant economic threat on cou nterparty risk that
may heighten non- performin g loans (Brogi etal.,2022;
Dietz etal.,2016; Monnin,2018; UNEPFI,2018; We ber
etal., 2 010). That is, CRR in banks can manifest as
reputational, regulatory and financial risks, mainly
credit risks. Whereas CRR present themselves directl y
across every economic actor, financial institutions are
also affected indirectly, through their investment and
lending portfolios (Bolton et al., 2020; NGFS, 2 019;
Weber etal.,2 010). Moreover, CRR can affect the fi-
nancial system through systemic amplifiers, such as
financial markets and other companies in the value
chain, triggering financial instability and systemic
risk through the so- called ‘green- swans’ (Battiston
et al., 2021; BCBS, 202 1a; Bolton et al., 2020;
Roncoroni et al., 2021). Policymakers and financial
authorities have defined roadmaps to understand
CRR and their potential effects more intensively
since the Paris Agreement (BCBS,2020; BoE,2 021a;
RESEARCH ARTICLE
Climate- related credit risk: Rethinking the credit risk
framework
HelenaRedondo1 | ElisaAracil1,2
Received: 17 November 20 23
|
Accepted: 24 Novembe r 2023
DO I: 10 .1111/17 58- 589 9.13 315
© 2024 Durham Univer sity and John Wiley & Son s Ltd.
1Facultad de Cienc ias Económicas y
Empresariales, Universidad Pontificia
Comillas, Madrid, Spain
2Instituto de Investigación Tecnológic a
(IIT), Universidad Po ntificia Comillas,
Madrid, Spain
Correspondence
Helena Redon do, Universidad Pontifi cia
Comillas, Madrid, Spain.
Email: meredondo@comillas.edu
Funding information
Ministerio de C iencia e Innovación, Gra nt/
Award Number: PID20 21- 124641NB- I00
Abstract
Climate change and the challenges asso ciated with the transition to a zero-
carbon economy pose signific ant financial risks. Climate- related risks (CRR)
indirectly impact banks through their loa n portfolios. To examine the integration
of CRR into banks' credit risk assessment and monitoring, t his article reviews
academic and institutional literature using quantitative bibliometric techniques
and content analysis of 145 academic documents from policymakers an d finan-
cial supervisors. A framework emerg es that incorporates CRR into credit risk
management. We find four thematic areas in the literature: CRR drivers, CRR
tools, CRR data and CRR pricing. Overall, uncertainty, non- linearity, geographic
and industrial dependency and no n- reversibilit y of CRR difficult climate- related
credit risk assessment. Moreover, CRR data present comparabilit y, availability
and reliability issues, which Ar tificial Intelligence can improve. Finally, evidence
reveals that current financial prices do not fully reflect CRR. O ur findings pro-
vide important implic ations to policymakers for assessing ex- ante the financ ial
impacts of climate transition regulations, the p otential for prudential regulatory
action, and the need for supra- national policies that facilitate acc ess to reliable
and comparable climate data.
Get this document and AI-powered insights with a free trial of vLex and Vincent AI
Get Started for FreeStart Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting