McKinsey Sustainability and Moody’s have joined forces to assist clients in effectively managing climate risk. This includes physical risk: using catastrophe-based models to simulate the impact of physical hazards; transition risk: using models that forecast the impact of the transition to a low-carbon economy; and credit risk: translating the financial impact of physical and transition risk into the credit profile of borrowers, loans, and assets using robust credit models across all major asset classes.
The collaboration builds on the work of McKinsey Sustainability’s Planetrics solution, which assists financial institutions in assessing climate risk and opportunity, as well as Moody’s Analytics suite of climate solutions.
Decarbonizing the global economy to achieve net-zero emissions will necessitate significant economic transformation. For example, research suggests that $9.2 trillion in annual average spending on physical assets may be required through 2050, with 70% going toward low-emissions products and enabling infrastructure like wind and solar generation.
Achieving this aggressive target will necessitate swift and decisive action. Banks and other financial institutions can play a critical role in the large-scale capital reallocation likely required to achieve net zero and manage their risks and opportunities.
According to McKinsey Sustainability and Moody’s, they have assisted one U.S. bank in measuring the credit impact of physical and transition risks on their Commercial Real Estate and Residential Real Estate portfolios under different climate scenarios. This allowed the bank to make more informed credit portfolio management decisions. They are, for example, rethinking their approach to the borrower and transaction-level risk assessments to better account for the impact of climate risk on the credit profile.
The collaboration will allow banks to model climate exposure at various levels across sectors and regions and quantify climate risk across their portfolios at a granular and financial level, said both companies.
