Regulators need to change the rules to ensure adequate climate risk management, write Rémy Estran-Fraioli, CEO of Scientific Climate Ratings and chair of the European Association of Credit Rating Agencies and Frédéric Ducoulombier, program director for climate regulation and policies at EDHEC Climate Institute and member of the Strategic Orientation Committee of Scientific Climate Ratings, in a recent article published by The Banker.
A recent global survey by UNEP FI and Global Credit Data found that only 18% of banks integrate climate risk into their internal ratings-based models, which drive regulatory capital requirements. The study cites data gaps and methodological hurdles but does not explain the deeper problem: credit risk and climate risk models are built on fundamentally different logics. Unless supervisors adapt, the IRB models of today will remain blind to one of the most significant credit risk drivers of this century.