Climate Risk Assessment via the Climabiz Tool

Piraeus Bank has developed the Climabiz Tool, which is based on the proprietary methodological approach of the Climate Risk Management Model (CRMM). The Tool uses the CRMM to assess in monetary terms the climate risk derived from the Bank’s business borrowers based on their turnover and the general operational and technical features of their respective field of activity.

Climabiz estimates in monetary terms climate related risks, for economic sectors and businesses that are significant for the Bank in terms of loan exposure.

To assess climate related risks, the Climabiz Tool uses climate scenarios, which simulate for different geographical areas of the country, both the historical (period 1961-1990) and the future (period 2021-2050) climate. The observed changes in a number of climatic parameters (temperature, rainfall, sunshine, etc.), are the data entered in the Climate Risk Management Model (CRMM), which in turn provides estimations for the impact of climate change on production activities.

The simulation of the business borrowers’ risks and opportunities derived from climate change is done by using Typical Units. These are standard, modeled representatives of production units of economic sectors, appropriately adapted to the Greek environment. 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, the amount of raw materials and energy consumed the capacity and the technologies used, the type and quantity of products produced and their turnover. Climate risk for each Typical Unit, is calculated in economic terms as a percentage of its turnover on the basis of inputs (raw materials, energy) and outputs (products/services, greenhouse gas emissions).

A Typical Unit incorporates all basic representative features of a business from a specific sector. The Typical Unit is built on a 4digit Nace Code of the respective economic activity with additional features such as:

  • For the Agriculture Sector: the type and method of cultivation, geographical region
  • For Services: the climate zone and for Hotels in particular the season duration, year of construction, type of energy use
  • For Manufacturing: the type of manufacturing (steel industry, oil refinery, aluminum production etc.)
  • For Electricity Production: the fuel and the technology utilized as well as the installed power and annual electricity production
  • Additionally, Typical Units take into consideration the EU Emissions Trading System, due to transition risks.

The Climabiz Tool is able to identify and analyze for each economic sector and business borrower two main categories of climate related risks:

  • Physical Risk, the financial impact that a company may have due to the change of climatic conditions, such as increase / decrease of the average temperature or the average rainfall, rise in sea levels, extreme weather conditions, such as heat waves, floods, etc.
  • 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, introduction of new low carbon technologies, changes in market operating conditions and consumer preferences, etc.

The Climabiz Tool can calculate, the business borrowers’ financial cost of the physical risk and the transition risk at 4 different levels, as briefly described below:

  1. Standard Typical Unit level: stored results, available for immediate use by the analyzer
  2. Custom Typical Unit level: by changing the turnover of the Typical Unit, new assessment results can be produced that will approach the actual financial size of applicant borrower
  3. Actual Typical Unit level: All parameters that determine the Typical Unit are adjusted, so that a detailed representation of the company under examination is made.
  4. 4.Aggregated Company level: Can apply forcompanies that are engaged in more than one economic activities. This level of analysis allows a combined climate risk assessment of the company’s economic activities.

The Climate Risk Management Models’ Upgrade

Τhe Climate Risk Management Model (CRMM) has been updated in order to align with the TCFD recommendations and the UNEP FI (United Nations Environment Programme Finance Initiative) scenario approach for assessing the effects of climate change on financial institutions.

The methodological update of the new CRMM regarding the physical risk assessment process, takes into account both the chronic effects of climate change and the effects associated with extreme weather events, by analyzing a number of climate scenarios. Specifically, the analysis is based on three out of totally four available RCPs (Representative Concentration Pathways) included in IPCC’s 5th Assessment Report, namely RCP2.6, RCP8.5 and RCP4.5. These climate scenarios present various greenhouse gases (GHGs) concentration trajectories in the atmosphere, based on different assumptions as regards global social and economic developments during the next decades, resulting in different climate futures.

Regarding the transition risk assessment upgrade, the new CRMM provides estimates of the resulting climate risks taking into account: (i) the existing scope 1, 2 and 3 emissions of the corresponding Typical Units; (ii) the investments required for businesses to significantly reduce their GHG emissions; (iii) to what extent the economic sectors analyzed can convey the costs associated with climate risks to their clients by increasing the prices of their products, and (iv) to what extent the increased prices of the products influence their demand.

Climate Risk calculation of the Bank’s business loan portfolio

For 2020, the climate risk of the Bank's business borrowers, assessed through the Climabiz Tool, amounted to € 1.037 billion, reduced by 1.25% compared to € 1.05 billion (2019). It corresponds to 0.58% of the total turnover of the specific borrowers.

Physical Risk constitutes 33.27% (2019: 32.7%) and Transition Risk 66.73% (2019: 67.3%) of the overall climate risk.

Climate risk was calculated based on the annual average allowance price of € 24.73 / tCO2 according to the European Emissions Trading Scheme for the year 2020. Data for the calculation of the average price were obtained from the LAGIE website: http://data1.lagie.gr.