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Climate Exposure Tool for Financial Risk Analysis

Periodic Reporting for period 1 - CLIMEX (Climate Exposure Tool for Financial Risk Analysis)

Reporting period: 2019-05-01 to 2020-10-31

CLIMEX aims to meet the growing demand from financial companies to assess the climate financial risks they face. Indeed, one of the most important developments occurring in the financial sector is a rapidly growing demand by financial companies for data and tools to estimate their financial exposure to climate risks. This demand concerns both climate physical risks, i.e. risks on properties and productive capital induced by climate-related events and, and climate transition risks, i.e. risks related to policy, regulation and technological shocks in the transition to a low-carbon economy. Transition risk for financial actors involves, for instance, the introduction of new reporting requirements, and the need for financial companies to mainstream climate-related financial risks in their risk management strategy.

With respect to financial reporting, financial companies face increasing pressure from central banks, financial regulators, investors, rating agencies and practitioners to disclose their exposure to climate-related financial risks. With respect to risk management, financial institutions need to assess if climate risks are material for their investments and, if so, to factor them in their risk management models. In particular, financial institutions can be exposed via loans, corporate bonds and equity holdings to economic activities that could be affected by the low-carbon transition, either positively or negatively, depending on their energy technology.

To meet the growing demand for climate-related financial disclosure, CLIMEX provides a solution that is currently not offered on the market. Indeed, there is currently no product or service that can deliver a credible, science-based, quantitative information on how much companies and the financial assets they issue are exposed to climate risks. There are rating agencies (such as MSCI, Sustainalytics and Robeco Sam) providing sustainability scores related also to climate change. However, they do not provide an assessment of investments and firms’ exposure to climate-related financial risks. Two main reasons stand behind this gap, i.e. (i) existing data on climate risks is not standardized, not observable from historical data, and hardly accessible outside the scientific community, (ii) climate risks are spread across the different types of financial instruments and asset classes, and no methodology existed, until recently, to map data on these risks to impacts on companies and financial assets.

Against this background, the CLIMEX project have pursued two objectives (O):

O1: Test CLIMEX market feasibility: to test the feasibility of bringing to the market the climate stress-test methodology developed in the FET project DOLFINS (grant no. 640772).
O2: Commercialization roadmap: to design a clear, actionable and effective roadmap articulated in 6 concrete steps that are measurable and achievable in the time span of the project.
1.2.1 Work Package 1. Project management and coordination. Leader: UZH (Stefano Battiston).
Task 1.1. Implementation coordination. Bi-monthly online meetings have been organized between the members of the project to review the progress of project activities and to manage any risk and conflicts occurring. Leader: UZH.
Task 1.2. Financial and administrative management. The coordinator node (UZH) has managed the communication among the partners, with third parties, and with the European Commission (EC). Moreover, it coordinated the delivery of periodic reports, of budgeting of tasks and accounting of expenditures. Leader: UZH.

1.2.2 Work package 2. Market analysis and IP-strategy. Leader: CLIMAFIN (Antoine Mandel).
Task 2.1 Market and competitiveness analysis: we have identified prospective customers, surveyed needs and expectations on the product, identified competitors, performed a SWOT analysis, forecasted potential market size and revenues, and consulted climate finance regulation experts. Leader: CLIMAFIN.
Task 2.2 IP-strategy. We have identified possible strategies to protect the IP and the know-how of the innovation, by evaluating advantages and disadvantages of options such as submission of a patent, registration of a trademark. Leader: CLIMAFIN.
Task 2.3 Start-up strategy. In response to the growing demand for services related to the use of the innovation we have launched a start-up company, called Climate Finance Alpha (CLIMAFIN), incorporated under French law. In this initial phase, the company website intentionally mimics the project website ( Leader: UZH.
Task 2.4 Commercialization strategy. We have evaluated several possible approaches to exploit the project’s innovation, and the legal and regulatory requirements for each approach. Leader: CLIMAFIN.

1.2.2 Work package 3. Demo, product testing and customer engagement. Leader: UZH (Irene Monasterolo).
Task 3.1 Commercial readiness. We tested the applicability of the innovation with broad set of potential customers from the financial industry, collecting feedbacks and identifying points of failure. Leader: UZH.
Task 3.2 Demo and website. We created an attractive project website including a project logo. The design of both the website and the logo have been carried by professional designers (see figures below). We have produced a pilot implementation of the methodology as an interactive MS Excel tool that illustrates the innovation on example portfolios. Moreover, online infographics have been created on the project website.
Leader: UZH.
Task 3.3 Customer engagement. We have engaged prospective customers through tailored webinars and workshops, involving prospective end-users from a range of target groups as described in the following table. Roles: UZH, CLIMAFIN.

Exploitation and dissemination of results.
The main categories of users of our results and the channels of dissemination we have been using to reach them are as follows.

Category of end users: Large asset managers, pension funds and insurance, banks
Channel of dissemination:Tailored demos and website, webinars, bilateral meetings, workshops.
Expected impact: Increase competitiveness of EU financial industry; foster alignment with TCFD guidelines and introduce climate targets in risk management practices.

Category of end users: Central banks and financial regulators
Channel of dissemination:Demo and website, webinars, workshops, technical assistance and capacity building
Expected impact: Support mission of regulators to preserve financial stability and ensure level playing field among EU financial actors.
In the face of the upcoming changes in the international financial regulatory environment (TCFD 2018), the EU financial industry has the opportunity to increase its competitiveness by leading the way in the alignment of financial portfolios to climate targets. In this context, CLIMEX has made a contribution to support the EU industry in this effort, in line with the EU Sustainable Finance Action Plan launched by the European Commission in 2018 and led by DG-FISMA, CLIMEX has contributed to shifting investments towards a low-carbon economy and hence to scaling up the role of finance in the achievement of the Sustainable Development Goals (SDGs).