A Global Private Credit Firm Strengthens Risk Assessment with Advanced Climate Analytics

Pain Points

In line with the team’s strategic climate-related risk assessment, stakeholder demands and related reporting requirements, the client identified several key needs:

• Expertise in quantifying climate risk: The firm needed a granular, quantitative framework to assess the projected impact of climate risks on the financial profile of their portfolios.
• Climate scenario analysis tools: Without objective assessments of the impact of the Network for Greening the Financial System (NGFS) scenarios across different business models, the firm’s risk analysis capabilities were limited to manual calculations that were laborious and difficult to complete on a consistent and repeatable basis.
• Tools for integrating proprietary analysis and data into their efforts: The team was specifically challenged with integrating proprietary data for private companies (eg, bespoke climate transition plans, when available), whilst also being able to apply meaningful industry aggregates for entities with less stringent environmental policies
• Translating transition pledges to financial impact: The team struggled with projecting financial statements based on transition targets of the companies, which impeded their ability to engage effectively with borrowers and report on environmental impacts.

These pain points highlighted the necessity for a robust climate credit analytics solution – a framework tailored to enhance systematic quantitative analysis. Climate Credit Analytics (CCA) emerged as the ideal solution, addressing the Risk & Quantitative Strategies team's needs and challenges, and positioning them favorably among fellow fiduciaries of institutional capital.

The Solution

Climate Credit Analytics (CCA) is an award-winning^[1] climate scenario analysis model suite launched in 2021. It makes the critical link between climate change and credit risk by translating climate scenarios into drivers of financial performance (e.g., production volumes, fuel costs and capex spending) tailored to specific industries. These drivers are then used to condition and forecast complete financial statements of corporates under various climate scenarios, including those published by the NGFS, a group of over 160 central banks, financial authorities, and observers.^[2]

Key Features

• Transparency into the modeling framework with a clear connection between key transition variables, drivers, and resultant financial impact: This enables clients to understand the model inputs, drivers and output, supporting confident reporting on climate-related financial risks to regulators and investors.
• Sensitivity Analysis: This feature empowers businesses to meticulously examine the potential impacts of change in specific variables or assumptions on their climate risk exposure. This capability facilitates the development of robust risk management strategies, empowering businesses to navigate climate-related challenges effectively.
• High degree of flexibility: CCA enables users to perform sensitivity analysis on many parameters and tailor key assumptions (e.g., counterparty transition planning) for decision-useful insights.
• Coverage of private and public companies: S&P Global Market Intelligence has company fundamental information and a waterfall approach to data enabling full portfolio analysis, even in cases where granular data is not readily available. The offering enables automated bottom-up analysis for 2.2 million companies. Where users have the requisite information, a proprietary analysis capability is also available.
• Compatibility with multiple climate scenarios: These include scenarios from 1) the NGFS, 2) Regulators including European Central Bank, Federal Reserve Board and Monetary Authority of Singapore 3) short term stress scenarios (which may be user-defined) for added flexibility.
• Best-in-class data: These tools leverage S&P Global’s extensive and proprietary datasets including company-level financial and emissions data, industry-specific data, and quantitative credit scoring methodologies.
• Easy Implementation: This includes a compact set of Excel templates connected to S&P Global’s databases for real-time on-the-fly analysis, as well as web services (for CCA) enabling users to undertake the analysis within their own IT environment.

Key Benefits

Implementing a comprehensive climate risk quantification solution offers several key benefits for the Risk & Quantitative Strategies team:

• Enhanced Risk Assessment: By utilizing advanced analytical tools and reliable data, the team accurately assesses and quantifies climate-related risks for their clients. They are now equipped with a more nuanced understanding of how environmental factors impact an entity’s financial profile.
• Informed Decision-making: Projected climate-conditioned financials empower the team with tailored insights into the potential climate impacts on their investment portfolios.
• Competitive Advantage: By seamlessly integrating climate risk assessments into their advisory framework, the firm positions itself as a leader in transition financing. This proactive approach not only caters to the growing demand for environmentally responsible investment strategies but also sets the firm apart in a competitive market attracting a broader base of environmentally conscious clients.
• TCFD Alignment: The solution supports alignment with TCFD recommendations, enhancing transparency and accountability in climate-related financial disclosures, further solidifying the firm’s commitment to responsible investing.

The Risk & Quantitative Strategies team leads in responsible investing, utilizing a robust climate risk quantification solution that boosts their analytical capabilities and aligns with industry standards. This strategic approach allows them to confidently navigate climate-related risks while enhancing their value proposition to clients and reinforcing the firm’s reputation in transition financing. Well-positioned for a sustainable future, the team is set to make a positive impact on both their clients and the broader market.

Click the links to know more about Climate Credit Analytics.

^{[1] Climate Credit Analytics Website. S&P Global Market Intelligence, as of October 18, 2024, https://www.spglobal.com/market-intelligence/en/solutions/products/climate-credit-analytics#awards}

^{[2] NGFS, as of October 18, 2024, https://www.ngfs.net/en/about-us/membership}