Climate Risk Assessment using the Climabiz Tool

Piraeus Bank in the context of the EU Life project “Climabiz), developed the Climabiz Tool, to assess in monetary terms, the climate risk derived from the Bank’s business borrowers. It was centered around economic sectors that are material to the Bank in terms of loan exposure, and vulnerability to climate change. The estimation of climate risk is based on the borrowers’ turnover and the general operational and technical features of their respective field of activity (NACE code).

To assess climate related risks, the Climabiz Tool uses climate scenarios, which simulate for different geographical areas of the country, both the historical (period 1971-2000) and the future (period 2021-2050) climate.

The Climabiz Tool is based on a set of RCPs, (three out of four pathways), each of them offering a plausible and internally consistent description of the future:

• RCP2.6 is a "very stringent" pathway and is likely to keep global temperature rise below 2°C by 2100
• The intermediate IPCC stabilization scenario RCP4.5, is more likely to result to a global temperature rise between 2 and 3 degrees °C, by 2100
• The high emission pathway, RCP8.5, is generally taken as the basis for the worst-case scenario (with a global mean temperature rise round 5oC).

Given the variety of different characteristics between economic sectors/sub-sectors, for the estimation of climate related risks of the economic sectors/sub sectors included in the Climabiz Tool, we have constructed Typical Units (TU).

Typical Units correspond to representative production units of economic sectors, appropriately adapted to the Greek economy. In other words, the Typical Units are illustrations of an "average" Greek company operating in an economic sector / sub-sector. The structure of the Typical Units is shaped by various characteristics, including the location of the business (within Greece), relevant mainly for specific economic sectors such as agriculture and hotels, the amount of raw materials and energy consumed, the capacity and the technologies used, the type and quantity of products produced and their turnover. The Typical Unit’s climate risk is calculated in economic terms (€) and as percentage of the TUs’ turnover based on inputs (raw materials, energy) and outputs (products/services, greenhouse gas emissions). The Typical Unit is built on a 4digit Nace Code of each respective economic activity incorporating features such as: company inputs and outputs (e.g. electricity consumption and GHG emissions per tonne of product).

The Climabiz Tool can assess for each economic sector and business borrower two main categories of climate related risks

A. Physical Risk: is the financial impact that a company may have due to the change of climatic conditions, owing to either longer-term shifts in climate patterns (chronic) or to the frequency and magnitude of extreme events (acute).

• Chronic effects: The long-term effect of changes in parameters such as temperature, rainfall, wind speed, cloud cover, sunshine and wind speed affecting the production unit (e.g. agriculture, RES), product demand (e.g. ice cream), raw material prices, heating needs- cooling, attractiveness of tourist destinations etc.
• Acute effects: the following extreme events are taken in consideration: floods, heat waves, strong winds-storms-waves, forest fires and their impact on production (e.g. agriculture) and infrastructure.

B. Transition risk: incorporates the additional costs faced by a company in the context of its transition to a low- carbon economy. Transition risks are driven by reform of the regulatory framework (policy and legal), introduction of new low carbon technologies (technology), changes in market operating conditions, consumer preferences, etc.

• Chronic effects: The long-term effect of changes in parameters such as temperature, rainfall, wind speed, cloud cover, sunshine and wind speed affecting the production unit (e.g. agriculture, RES), product demand (e.g. ice cream), raw material prices, heating needs- cooling, attractiveness of tourist destinations etc.
• Acute effects: the following extreme events are taken in consideration: floods, heat waves, strong winds-storms-waves, forest fires and their impact on production (e.g. agriculture) and infrastructure.

The Climabiz calculates:

A. Physical risk

The chronic and acute effects: which is defined as the financial impact arising from:

a) changes in average climatic conditions
b) changes in the frequency and intensity of extreme weather events

B. Transition Risk

Transition risk includes: (a) direct and indirect GHG emissions cost, (b) low carbon capex and emissions reductions and (c) impact of emissions cost or capex on market share and revenues and it may be differentiated during 2021-2050 reflecting changes on CO2 prices.

• Scope 1,2 and 3 emissions during the current situation and the costs deriving from carbon pricing
• Investments required for the transition to a low carbon business operation and the new Scope 1 and 2 emissions and costs resulting after the investments are made
• The business’s ability of passing on the compliance costs (due to the Scope 1,2,3 emissions or due to the low carbon investments) to product prices as well as the impact on product demand based on the market elasticity

Considering the large number of risk components taken into account during the climate risk calculation through Climabiz, the Total Climate Risk of the business loan portfolio is estimated based on the following approach:

• The chronic and acute physical risks for a selected climate scenario are summed for the estimation of total physical risk.
• The transition risk is initially estimated as the minimum of (a) direct and indirect emissions cost and (b) low carbon emissions cost. Then it is adjusted based on the sector/sub-sector’s product elasticity and pass-through capability.
• The Total Climate Risk is estimated for each Typical Unit as the sum of Total Physical Risk and Adjusted Transition Risk.

CLIMATE RISK CALCULATION WITH THE CLIMABIZ TOOL

Piraeus Bank carries out on an annual basis, using the Climabiz Tool, the economic assessment on the climate risk of its business borrowers, deriving from important economic sectors for the Bank that are active in Greece.

Piraeus used for the first time three RCP climate scenarios for the 2021 climate risk calculation of the business portfolio which amounts to € 18.9 billion, of which the Portfolio Corporate amounts to € 9.2 billion, while the SME portfolio amounts to € 9.7 billion.

For 2021, the total is presented in percentage of the physical and transition risk on total climate risk per RCP climate scenario.

The percentage of total climatic risk (physical and transition risk) corresponding to the RCP 2.6 climate scenario is 4.4% of the business borrowers’ total turnover, while for the RCP4.5 and RCP8.5 climate scenarios the corresponding percentages are 2.7% and 1.7% respectively.

It is noted that the significant fluctuations in the climate risk outputs between the climate scenarios are primarily due in the fluctuations of the transition risk. For that purpose, in order to calculate the cost of direct and indirect emissions, 3 different prices of the cost of carbon emission allowances €/tCO2 are used for the period 2020-2030 based on NGFS scenarios.

• For the RCP 2.6 the emissions allowance price of the Net Zero 2050 NGFS scenario has been used been used with a cost of 139.9€/t CO2
• For the RCP 4.5 the emissions allowance price of the Nationally Determined Contributions (NDCs) scenario has been used with a cost of 73.5€/t CO2
• For the RCP 8.5 the emissions allowance price of the Current Policies NGFS scenario has been used been used with a cost of 21.4€/t CO2