WEBVTT - Weathering the Storm: Climate Risk Stress Tests 0:00:00.200 --> 0:00:02.560 This is Tom ronnins Reese, and you're listening to Switched 0:00:02.600 --> 0:00:04.840 on the podcast brought to you by B and EF. 0:00:05.200 --> 0:00:08.039 With climate change in extreme weather events becoming more prevalent, 0:00:08.240 --> 0:00:11.800 central banks and financial supervisors are facing new risks alongside 0:00:11.840 --> 0:00:15.680 those existing from geopolitics and volatile capital markets. To counter 0:00:15.760 --> 0:00:18.360 this climate threat, some central banks have been creating and 0:00:18.400 --> 0:00:21.320 conducting climate risk stress tests in order to make sure 0:00:21.400 --> 0:00:24.759 financial institutions are capable of riding out potential impacts on 0:00:24.840 --> 0:00:28.040 businesses and investments. But what do these climate risk stress 0:00:28.080 --> 0:00:31.000 tests entail? What are the approaches that different central banks take, 0:00:31.120 --> 0:00:34.200 and which markets are taking this climate threat seriously. Today, 0:00:34.200 --> 0:00:36.640 I'm joined by Tiff and Brandley Bloomberg, NIF's head of 0:00:36.680 --> 0:00:39.280 Transition Risk and Alignment, who draws from findings from his 0:00:39.360 --> 0:00:42.240 note Climate Risk Stress Test Review, which B and EF 0:00:42.280 --> 0:00:44.120 clients can find at B and EF go on the 0:00:44.120 --> 0:00:47.519 Bloomberg Terminal or on BNF dot com. On our website, 0:00:47.560 --> 0:00:50.040 B and EF clients can also find our Transition Risk 0:00:50.120 --> 0:00:53.280 Model TRACKED, which assesses around eighty thousand companies and is 0:00:53.320 --> 0:00:57.520 now integrated into Bloomberg's MARS climate stress testing solution. Also 0:00:57.560 --> 0:00:59.600 on today's show, we are joined by a special guest, 0:00:59.600 --> 0:01:02.520 at Osh, the head of Climate, Nature and Regulatory Financial 0:01:02.560 --> 0:01:05.280 Solutions at Bloomberg, where he and his team provide data 0:01:05.360 --> 0:01:08.679 and analytics that help investors incorporate climate and nature related 0:01:08.760 --> 0:01:12.680 risks in investment decisions and comply with sustainable disclosure requirements. 0:01:12.920 --> 0:01:15.240 Prior to Bloomberg, Edo was a manager of the Climate 0:01:15.280 --> 0:01:17.280 Scenarios team at the Bank of England, where he led 0:01:17.280 --> 0:01:20.039 the development of the NNGFS scenarios, and while working at 0:01:20.080 --> 0:01:21.959 the Dutch National Bank, he was part of the first 0:01:22.000 --> 0:01:25.440 ever climate stress test conducted by a central bank. Examples 0:01:25.440 --> 0:01:27.520 of his team's work be found on the terminal at 0:01:27.720 --> 0:01:31.800 WSL Physical Risk or WSL Water. All right, let's get 0:01:31.800 --> 0:01:45.399 talking about climate risk stress tests with Tiffin and Edo. Tiffin, 0:01:45.800 --> 0:01:48.840 welcome to the podcast today, please to be here. Tom 0:01:49.040 --> 0:01:52.480 and Ado welcome on board as well. Thanks Tom, so. 0:01:52.680 --> 0:01:55.920 I know that you both come into this question of 0:01:56.040 --> 0:01:59.960 climate stress testing from quite different angles and have had 0:02:00.040 --> 0:02:03.360 different experiences in the space. So my first question was, 0:02:03.440 --> 0:02:05.240 you know, to talk about maybe the history of climate 0:02:05.280 --> 0:02:08.480 stress testing. But before we even do that, for those 0:02:08.520 --> 0:02:10.840 of us and I include myself in this that are 0:02:10.840 --> 0:02:13.800 not really familiar with this concept, can you explain what 0:02:13.840 --> 0:02:16.680 a climate risk stress test is or even just what 0:02:16.840 --> 0:02:17.919 is a stress test? 0:02:18.240 --> 0:02:22.360 So stress test is a way for financial supervisor to 0:02:22.720 --> 0:02:26.519 assess the resiliency of the financial system, and this means 0:02:26.720 --> 0:02:31.640 assessing regulated entities, so these can be banks, insurances, even investors, 0:02:31.919 --> 0:02:35.840 and looking at different scenarios to know whether these institutions 0:02:35.880 --> 0:02:39.120 are impacted and whether they are resilient to different type 0:02:39.120 --> 0:02:41.919 of shocks. A new type of shocks that has emerged 0:02:42.040 --> 0:02:45.760 in the last ten years is shocks coming from climate risk. 0:02:45.880 --> 0:02:48.560 So this can be the transition risk, so the risk 0:02:48.639 --> 0:02:53.840 arising from climate policies, shifting consumer preferences, or technology disruption, 0:02:54.080 --> 0:02:56.160 and also physical risks, so this is sort of your 0:02:56.200 --> 0:03:02.040 classic natural disasters or the chronic risk rising temperatures, overall 0:03:02.200 --> 0:03:03.360 sea level rise and so on. 0:03:03.680 --> 0:03:06.919 Yeah, from my kind of perspective, stress testing became quite 0:03:06.960 --> 0:03:10.040 popular as a regulatory tool after the two thousand eight 0:03:10.040 --> 0:03:13.440 financial crisis. The Basal Committee for Banking Supervision set up 0:03:13.480 --> 0:03:16.639 principles for stress testing which had nothing to do with climate, 0:03:16.680 --> 0:03:19.040 mind you, but but more generally, and one of the 0:03:19.080 --> 0:03:22.680 principles that they highlighted was that stress tests look to 0:03:23.160 --> 0:03:26.880 analyze scenarios that are severe but plausible. So it's explicitly 0:03:26.919 --> 0:03:29.960 not about you know, business as usual risk management, but 0:03:30.040 --> 0:03:33.880 really thinking to more extreme cases that could occur, such 0:03:33.919 --> 0:03:36.000 as the two thousand and eight financial crisis, and make 0:03:36.040 --> 0:03:38.320 sure we're better prepared for such events in the future. 0:03:38.520 --> 0:03:41.480 Got it. So I mean when we say financial supervisors, 0:03:41.800 --> 0:03:44.440 do we mean people like the regulators, the government and 0:03:44.560 --> 0:03:45.320 central banks. 0:03:45.560 --> 0:03:48.600 And also you can have let's say the SEC in 0:03:48.680 --> 0:03:53.400 the US, so Securities Exchange Commission, which is basically supervising 0:03:53.680 --> 0:03:57.160 and looking at equity markets. So it is a range 0:03:57.320 --> 0:04:01.600 of institution agencies that all looking at financial risk. 0:04:01.720 --> 0:04:05.560 Essentially, Let's say a central bank is running a stress test, 0:04:05.840 --> 0:04:09.640 it's not just looking at its own sort of commitments 0:04:09.680 --> 0:04:13.720 in relation to the risks that you highlighted. So I 0:04:13.720 --> 0:04:18.440 think you said transition risk, then weather events and then 0:04:18.560 --> 0:04:21.680 chronic climate risk were the three main categories. It's not 0:04:21.760 --> 0:04:24.760 just looking at those in relation to the Bank of England, 0:04:24.880 --> 0:04:28.080 for example, be looking at the whole UK financial system 0:04:28.160 --> 0:04:30.720 when it's doing that stress test. Is that do I 0:04:30.800 --> 0:04:32.160 understand it correctly? Yeah? 0:04:32.160 --> 0:04:34.640 That's exactly right. So within the Bank of England, actually 0:04:34.720 --> 0:04:40.960 it's the prad Prudential Regulation Authority which is responsible for 0:04:41.120 --> 0:04:45.040 just that prudential regulation and in essence is at the 0:04:45.080 --> 0:04:48.360 perfect wordsworld. Actually it seeks to ensure the financial stability 0:04:48.440 --> 0:04:49.800 of the UK financial system. 0:04:50.120 --> 0:04:54.599 So Ado, you have got some experience actually in being 0:04:54.680 --> 0:04:57.640 involved in the financial institutions that have been running some 0:04:57.680 --> 0:05:00.240 of these stress tests, how do you go about? I mean, 0:05:00.240 --> 0:05:02.800 what does that look like? And is it difficult or easy? 0:05:03.200 --> 0:05:05.480 Did you have to kind of invent your own version 0:05:05.480 --> 0:05:06.560 of it with each institution? 0:05:07.240 --> 0:05:11.200 I suppose it's come along way over the years, And 0:05:11.279 --> 0:05:13.159 I'll just flag up front that you know, I don't 0:05:13.240 --> 0:05:16.640 work at these institutions anymore, so I can't represent the institutions. 0:05:16.680 --> 0:05:20.560 But from my experience working on climate stress testing, when 0:05:20.600 --> 0:05:23.560 we started out the first stress test that I was 0:05:23.600 --> 0:05:26.720 a part of, we didn't really have a president of 0:05:26.960 --> 0:05:29.400 climate stress testing and we didn't know what it looked like, 0:05:29.480 --> 0:05:31.240 so we had to more or less invent the wheel. 0:05:31.400 --> 0:05:35.440 What we did have, though, is a decent conceptual understanding 0:05:35.720 --> 0:05:38.440 of what we were trying to do. There was already 0:05:38.480 --> 0:05:42.880 in academic literature kind of separating out climate transition risks 0:05:42.920 --> 0:05:46.320 from climate physical risks as different risk channels to look 0:05:46.360 --> 0:05:50.120 at and some insight onto what those risk transmission channels 0:05:50.200 --> 0:05:53.080 could look like. So what we really needed to then 0:05:53.240 --> 0:05:56.400 do is think about how could we model these risk 0:05:56.440 --> 0:05:59.479 transmission channels in a scenario setup that's going to be 0:05:59.480 --> 0:06:02.880 relevant for financial institutions. But yeah, as you can imagine 0:06:02.920 --> 0:06:05.120 with anything new, we did run into a number of 0:06:05.240 --> 0:06:07.000 challenges along the way trying to do that. 0:06:07.440 --> 0:06:09.479 And what sort of challenges were those? 0:06:10.040 --> 0:06:13.440 Well, for for example, you know, if suppose a risk 0:06:13.480 --> 0:06:17.640 transmission channel is a carbon price increasing. This is one 0:06:17.720 --> 0:06:19.680 channel that that was quite often used in a lot 0:06:19.680 --> 0:06:21.600 of climate stress test where we say, okay, suppose the 0:06:21.640 --> 0:06:25.560 carbon price goes up. How would that impact the exposures 0:06:25.560 --> 0:06:28.320 of financial institutions. Well, then you need to start thinking 0:06:28.360 --> 0:06:32.440 about what are the GHD emissions of those financial institutions, 0:06:32.440 --> 0:06:36.560 How could thoseg emissions be the gg emissions of the 0:06:36.600 --> 0:06:40.000 companies that financial institutions are invested in, And how could 0:06:40.120 --> 0:06:43.200 a carbon price impact the cost structure of these companies, 0:06:43.200 --> 0:06:45.839 and how could that ultimately affect things like the credit 0:06:45.839 --> 0:06:48.520 worthiness of the companies. That's going to have a bearing 0:06:48.520 --> 0:06:52.520 on the financial institutions stability and safety and soundness. So 0:06:52.880 --> 0:06:55.800 you have to think backwards, and then you realize that 0:06:55.839 --> 0:06:58.480 at that time especially, there wasn't very good data on 0:06:58.600 --> 0:07:02.239 things like GHD emissions, and there wasn't really a president 0:07:02.279 --> 0:07:04.240 of how do you model the impact of a common price? 0:07:04.279 --> 0:07:06.400 How does that play too on the cost structure of 0:07:06.440 --> 0:07:09.560 that company? Could they pass it to to upstream suppliers 0:07:09.600 --> 0:07:12.360 downstream consumers. So there were a lot of new questions 0:07:12.400 --> 0:07:14.800 we uncovered in the process, and a lot of the 0:07:14.840 --> 0:07:17.400 stress tests that have happened over the year, have you know, 0:07:17.440 --> 0:07:20.920 as part of their objectives, have had capacity building to 0:07:21.040 --> 0:07:24.080 just try and understand these questions better and kind of 0:07:24.400 --> 0:07:26.440 learn ways of answering them. 0:07:26.840 --> 0:07:31.760 And how often are stress tests you know necessary? I mean, Tiffan, 0:07:31.920 --> 0:07:35.760 I had a quick peek at your climate stress test 0:07:35.800 --> 0:07:37.880 review No, and I was quite struck by the chart 0:07:38.040 --> 0:07:40.640 on the front of that piece of research which showed, 0:07:40.760 --> 0:07:42.640 you know, what's looked to me like a wave of 0:07:42.680 --> 0:07:47.440 stress tests happening in late twenty tens, early twenty twenties 0:07:47.800 --> 0:07:51.040 that then sort of tails off. Is that just because 0:07:51.400 --> 0:07:55.000 a phase of stress tests amongst certain central banks has 0:07:55.040 --> 0:07:57.960 been complete or is you know, I'm presuming this isn't 0:07:57.960 --> 0:07:59.960 because they were in fashion now they've gone out of fashion. 0:08:00.040 --> 0:08:02.880 It's just they've been done for now. Am I reading 0:08:02.920 --> 0:08:03.280 it right? 0:08:03.480 --> 0:08:06.800 Yes? So my Curley Sunny Park and I looked at 0:08:06.880 --> 0:08:09.720 forty three different climat risk stress tests that have been 0:08:09.720 --> 0:08:12.400 published since twenty seventeen. So if you look at the 0:08:12.520 --> 0:08:15.440 history of stress tests, you know, going back to twenty 0:08:15.480 --> 0:08:18.200 fifteen twenty seventeen, this is when we see the first 0:08:18.240 --> 0:08:21.760 academic studies. The first one was from Stefano Battiston and 0:08:21.800 --> 0:08:26.240 he really set the conceptual framework for stress testing. The 0:08:26.320 --> 0:08:29.440 Dutch Central Bank DNB was the first one to publish 0:08:29.600 --> 0:08:32.520 twenty seventeen twenty eighteen a transition risk and then a 0:08:32.559 --> 0:08:36.720 physical risk stress test. And it's no surprise that DNB 0:08:36.880 --> 0:08:39.680 actually published the first physical risk stress test because the 0:08:39.679 --> 0:08:43.920 Netherlands has a lot of exposure to physical risk from 0:08:44.160 --> 0:08:47.720 sea level rise. Twenty nineteen is also a very important 0:08:47.760 --> 0:08:50.559 date for stress testing because this is when the NNGFS 0:08:50.640 --> 0:08:53.400 so the Network for Greening the Financial System, which is 0:08:53.440 --> 0:08:56.320 an alliance of central banks and financial regulators. This is 0:08:56.320 --> 0:09:00.720 when the MNGFS launched its open source scenarios that really 0:09:00.920 --> 0:09:04.200 created the blueprint for a lot of central banks around 0:09:04.240 --> 0:09:07.880 the world to build their own stress test upon and 0:09:07.920 --> 0:09:10.160 so you know, in twenty twenty one, twenty twenty two, 0:09:10.360 --> 0:09:13.320 our stress test review shows that, you know, there's almost 0:09:13.559 --> 0:09:17.560 thirty exercises that have been published. Some of them are 0:09:17.679 --> 0:09:20.040 sort of first of a kind or one off, and 0:09:20.080 --> 0:09:22.960 some others have a frequency of you know, a year 0:09:23.160 --> 0:09:26.200 two year. What we see is a lot of central 0:09:26.280 --> 0:09:31.640 banks integrating climate stress testing into their own standard risk review. 0:09:31.679 --> 0:09:34.120 It's not necessarily a part yet of what we call 0:09:34.320 --> 0:09:37.480 the capital requirements. So usually, you know, a stress test, 0:09:37.600 --> 0:09:39.719 one of the main goals would be to derive a 0:09:39.920 --> 0:09:42.920 number that would quantify the amount of money that an 0:09:43.000 --> 0:09:46.200 institution has to set aside to face a certain shock. 0:09:46.400 --> 0:09:50.880 So climatory stress testing is not currently leading to capital 0:09:50.960 --> 0:09:54.959 adequacy requirements, but central banks are mainly trying to push 0:09:55.120 --> 0:09:58.679 to raise awareness around this new source of risk and 0:09:58.720 --> 0:10:02.600 also build cap city within their regulated entities in terms 0:10:02.600 --> 0:10:05.920 of the modeling, making sure that banks hire different teams 0:10:05.960 --> 0:10:07.760 that are able to look at these questions. 0:10:08.000 --> 0:10:11.079 So you've introduced this idea of an MGFS there, what 0:10:11.120 --> 0:10:13.719 does that stand for? And yeah, can you just give 0:10:13.800 --> 0:10:16.120 us a little bit more detail about how it operates 0:10:16.160 --> 0:10:17.640 and what's under the hood. 0:10:17.640 --> 0:10:20.640 There So the NNGFS is the Network for Greening the 0:10:20.640 --> 0:10:24.920 Financial System. This is an alliance of regulators that are 0:10:25.040 --> 0:10:29.120 looking to incorporate climate in the supervisory scope. So the 0:10:29.240 --> 0:10:33.000 NNGFS counts more than one hundred and forty members. You 0:10:33.080 --> 0:10:37.240 have central banks, you have financial regulators. Development banks also 0:10:37.360 --> 0:10:39.440 are part of the NGFs, and so there are different 0:10:39.480 --> 0:10:42.360 working groups that are working across a range of topics. 0:10:42.440 --> 0:10:46.120 The main topic that stood out and the main work 0:10:46.160 --> 0:10:49.480 that stood out out of the NGFs is the NGNGFS scenarios. 0:10:49.480 --> 0:10:52.680 So these are climate scenarios that look across physical risk 0:10:52.760 --> 0:10:55.679 and transition risk. The long term scenarios are looking out 0:10:55.720 --> 0:10:58.800 to twenty one hundred on a five year basis. And 0:10:59.280 --> 0:11:02.040 when you think of you know, the nngfsnios. This is 0:11:02.120 --> 0:11:05.760 quite different actually from the scenarios that BNF can publish 0:11:06.040 --> 0:11:09.760 or the International Energy Agency can publish. The NNGFS scenarios 0:11:09.760 --> 0:11:12.000 are not normative, so they don't tell you what you 0:11:12.080 --> 0:11:15.160 should do in order to achieve a certain climate outcome, 0:11:15.240 --> 0:11:18.720 like a net zero emissions pathway. The nngfsnios are really 0:11:18.760 --> 0:11:22.440 here to explore different plausible futures and they're interested in 0:11:22.480 --> 0:11:24.600 sort of exploring those extremes as well, you sort of 0:11:24.760 --> 0:11:27.920 extreme a physical risk and extreme transition risk, and what 0:11:28.080 --> 0:11:30.920 happens if the transition is delayed for a long time 0:11:31.040 --> 0:11:32.760 and then all of a sudden, you know, in the 0:11:32.760 --> 0:11:36.360 twenty thirties, you have a policy shock that imposes a 0:11:36.520 --> 0:11:40.079 very strangent pathway to the economy to decarbonize very fast. 0:11:40.320 --> 0:11:43.640 There are six to seven scenarios depending on the phase 0:11:43.840 --> 0:11:46.360 of the nngfsnios you're looking at, and these are really 0:11:46.400 --> 0:11:49.600 here to explore this world of risk from a physical 0:11:49.600 --> 0:11:50.880 and transition standpoint. 0:11:51.240 --> 0:11:53.920 So could you just I think you mentioned that there's 0:11:54.000 --> 0:11:56.280 the scenarios that it looks at. There's sort of three 0:11:56.400 --> 0:11:59.120 main ones. You just explain what those are. 0:11:59.320 --> 0:12:02.600 Yeah, So they are three categories. You have the orderly 0:12:02.720 --> 0:12:07.360 transition category, you have disorderly transition category, and then you 0:12:07.480 --> 0:12:11.160 have the hothouse world. So elderly transition this is a 0:12:11.200 --> 0:12:16.120 relatively smooth transition pathway where the economy starts decarbonizing basically 0:12:16.120 --> 0:12:19.760 from next year onwards at a steady pace. And this 0:12:20.200 --> 0:12:23.600 transition sort of limits the amount of physical risk that 0:12:23.679 --> 0:12:26.320 there will be later on in the scenario. So we 0:12:26.360 --> 0:12:30.120 decalbonize fast. We don't accumulate as much greenhouse gases into 0:12:30.160 --> 0:12:33.360 the atmosphere, and so natural disaster are a little less 0:12:33.400 --> 0:12:37.760 frequent than they would have otherwise been. Disorderly transition is 0:12:37.800 --> 0:12:40.679 looking at what I already describe. So this is assuming 0:12:40.800 --> 0:12:43.480 that the transition does not happen in the short and 0:12:43.559 --> 0:12:46.079 mid term, but then by a certain date you start 0:12:46.080 --> 0:12:49.960 seeing more climate policies coming and disrupting part of the economy. 0:12:50.040 --> 0:12:54.040 So you can think of for example, bands internal combustion 0:12:54.200 --> 0:12:58.200 engine cars being implemented pretty heavily across the world and 0:12:58.240 --> 0:13:00.679 so disrupting one part of the economy. And then the 0:13:00.720 --> 0:13:04.600 hot house world is a very high intensity, physical risk 0:13:04.679 --> 0:13:07.920 world where we do not decarbonize fast enough and so 0:13:08.040 --> 0:13:10.880 we continue accumulating a lot of emissions in the atmosphere, 0:13:10.920 --> 0:13:14.160 and this leads to very frequent and high amplitude and 0:13:14.240 --> 0:13:17.240 natural disasters and the physical risk impacts. 0:13:17.640 --> 0:13:21.720 So ado, I mean you've had some experience of applying 0:13:21.760 --> 0:13:24.480 these scenarios in the stress test that you've been involved 0:13:24.480 --> 0:13:27.120 in developing. Is it ay standard? How they are applied 0:13:27.120 --> 0:13:30.400 across different institutions stress tests? Well, they were. 0:13:30.320 --> 0:13:32.959 Actually maybe it's a great point, they were actually developed 0:13:33.160 --> 0:13:37.080 to serve as a baseline for primarily regulators central banks 0:13:37.200 --> 0:13:41.200 to frame stress tests around. So the idea was, let's 0:13:41.200 --> 0:13:44.680 develop a set of common scenarios that can then be 0:13:44.760 --> 0:13:47.520 refined to meet the specific context of the regulator, the 0:13:47.559 --> 0:13:50.480 specific risk they want to prope and maybe any specific 0:13:50.679 --> 0:13:54.280 local jurisdictional features that they would want to incorporate. So 0:13:54.320 --> 0:13:56.920 they're very much as starting point, and in fact the 0:13:57.360 --> 0:14:00.560 Bank of England's climate be annual exploratory scenario or the 0:14:00.559 --> 0:14:03.640 stresses that they ran in the UK. The scenarios that 0:14:03.679 --> 0:14:06.959 were used actually deviated from the ng festerinaris in a 0:14:07.000 --> 0:14:10.199 few places, even though the anti festerinaris were used as 0:14:10.240 --> 0:14:13.600 the baseline, if you will, But then certain tweaks were made, 0:14:13.640 --> 0:14:17.000 for example, around physical risks. There was an understanding that 0:14:17.040 --> 0:14:20.720 the NNGFS scenarios, due to modeling constraints that are that 0:14:20.800 --> 0:14:24.280 are well restrewed across climate modelers, there was a risk 0:14:24.680 --> 0:14:28.480 that the scenarios didn't capture the fullest extent of physical 0:14:28.600 --> 0:14:31.320 risks that may actually occur. So the Bank of england 0:14:31.320 --> 0:14:34.320 took steps to mpop some of the physical risks in 0:14:34.360 --> 0:14:37.360 their exercise, essentially to get to that severe but still 0:14:37.400 --> 0:14:41.200 plausible a level of stress that you want to analyze. 0:14:41.480 --> 0:14:43.560 So where in the world have we been seeing some 0:14:43.680 --> 0:14:46.480 of these stress tests happening across the world? 0:14:46.760 --> 0:14:50.640 Emia apak amor, but we have to say you really 0:14:50.720 --> 0:14:54.040 let the charge in terms of developing the framework. And 0:14:54.080 --> 0:14:58.080 actually the NNGFS as Secretariat was hosted i believe by 0:14:58.120 --> 0:15:01.320 ban de France and Bank of England, and so DNB 0:15:01.480 --> 0:15:04.200 also has played a role. Out of the forty three 0:15:04.240 --> 0:15:07.960 stress test that Sanny and I reviewed, we found that 0:15:08.400 --> 0:15:12.360 more than forty percent of them have been conducted across Europe. 0:15:12.440 --> 0:15:15.600 So Europe really played a role in that first wave 0:15:15.720 --> 0:15:18.720 of stress tests, so between twenty twenty one and twenty 0:15:18.800 --> 0:15:22.240 twenty two, and then we saw this spread across the world. 0:15:22.240 --> 0:15:24.560 So APAC really took the lead towards the end of 0:15:24.600 --> 0:15:27.160 twenty twenty two and twenty twenty three with a lot 0:15:27.320 --> 0:15:30.000 of new stress tests that were published on the back 0:15:30.040 --> 0:15:34.560 of the NNGFS scenarios. Overall, we found that between sixty 0:15:34.560 --> 0:15:37.600 and seventy percent of transition risk and physical risk stress 0:15:37.640 --> 0:15:41.640 test were conducted on the back of the NNGFS scenarios. 0:15:41.720 --> 0:15:45.880 Another source of climate scenario data is the IPCC, and 0:15:45.920 --> 0:15:48.800 you have also different ways of capturing the risk. You know, 0:15:48.840 --> 0:15:52.160 different models, but NNGFS has really been the blueprint for 0:15:52.240 --> 0:15:54.800 a lot of countries to develop their own stress test. 0:15:55.040 --> 0:15:57.400 So it's not the only show in town, but it's 0:15:57.400 --> 0:16:01.800 the main one in this domain. Absolutely, so is the EU. 0:16:02.160 --> 0:16:04.200 I mean you mentioned that this kind of started in 0:16:04.240 --> 0:16:07.200 the EU, but you know we're now seeing in other regions. 0:16:07.320 --> 0:16:09.880 Is the EU still playing a leading role in this runt? 0:16:10.040 --> 0:16:14.160 I would say yes. And last year the EU published 0:16:14.240 --> 0:16:18.520 a new type of stress tests which incorporated the FEIT 0:16:18.600 --> 0:16:21.360 for fifty five policy package or the U in a 0:16:21.480 --> 0:16:24.240 very granular way. So this is sort of the decarbonization 0:16:24.480 --> 0:16:28.120 policy package across the U, and this stress test really 0:16:28.160 --> 0:16:31.600 looked at the risk across all the banks, the insurers 0:16:31.840 --> 0:16:35.720 and dig very deep into some of the implications across 0:16:35.720 --> 0:16:38.720 sectors of these policies. So this is sort of the 0:16:38.800 --> 0:16:42.120 you trying to anticipate some of the risks coming from 0:16:42.360 --> 0:16:45.680 sector level climate policies. And I think this is also 0:16:45.960 --> 0:16:50.440 this sets a very interesting precedent for other stress testers 0:16:50.600 --> 0:16:53.880 to look at, not just running the analysis in a 0:16:53.960 --> 0:16:57.120 very generic way, but running those stress tests in a 0:16:57.200 --> 0:16:59.840 specific policy orientated way. 0:17:00.240 --> 0:17:03.280 So that's the role that EU is playing, and obviously 0:17:03.320 --> 0:17:06.280 you're both sitting in Europe, but I'm here in the US, 0:17:06.480 --> 0:17:09.520 and you just turn on ANYTV channel and you can 0:17:09.560 --> 0:17:12.760 see that it is a very different environment politically here 0:17:12.920 --> 0:17:15.880 than it was, say a year ago, and then particularly 0:17:15.960 --> 0:17:18.920 in relation to questions around climate. So has that had 0:17:18.920 --> 0:17:22.320 an impact at all on stress tests in the US 0:17:22.400 --> 0:17:23.919 or plans around stress tests? 0:17:24.160 --> 0:17:27.520 So the US published in twenty twenty four a pilot 0:17:27.600 --> 0:17:32.880 stress test that included six large banks, so that's you know, Goldman, Sachs, JP, Morgan, 0:17:33.080 --> 0:17:36.160 and other banks. And this stress test was actually very interesting. 0:17:36.320 --> 0:17:38.439 So on the physical risk side, it looked at the 0:17:38.480 --> 0:17:42.199 impact of hurricanes in the northeast of the US, looking 0:17:42.240 --> 0:17:46.440 at you know, hundreds of thousands of residential and commercial loans. 0:17:46.560 --> 0:17:48.639 And on the transitionersk side, it looked at, you know, 0:17:48.680 --> 0:17:51.560 the impact of transition risk and potticas on real estate, 0:17:51.600 --> 0:17:53.840 for example. So I thought was this was a very 0:17:53.880 --> 0:17:58.160 promising episode. But actually right before the Trump administration came 0:17:58.200 --> 0:18:02.159 into office, So in Jazz Neurary twenty twenty five, the 0:18:02.200 --> 0:18:06.040 Federal Reserve actually exited the NGFs And so this is 0:18:06.080 --> 0:18:09.600 sort of a reaction potentially to the current politics and 0:18:09.680 --> 0:18:13.320 the current environment in US politics. But nevertheless, physical is 0:18:13.359 --> 0:18:15.879 are very important today in the US. So you're seeing 0:18:16.359 --> 0:18:21.560 heightened natural disasters. There's a wild fire season now in California. 0:18:21.640 --> 0:18:24.960 You have zones across the US that have become unensurable 0:18:25.119 --> 0:18:29.199 from a residential and commercial real estate standpoint. And so 0:18:29.600 --> 0:18:32.959 while the US is sort of backing away from stress 0:18:32.960 --> 0:18:36.439 testing potentially for a while, there are actual effects that 0:18:36.520 --> 0:18:38.440 are being felt across the economy. 0:18:38.560 --> 0:18:41.280 I might add to two additional developments that I could 0:18:41.280 --> 0:18:44.760 shed some light here. So while the Central banks were 0:18:45.000 --> 0:18:48.240 developing climate stress tests, there was another group called the 0:18:48.320 --> 0:18:52.720 Task Course for Climate Related Financial Disclosures TCFD, which came 0:18:52.720 --> 0:18:55.800 out with a set of recommendations in twenty seventeen. The 0:18:55.840 --> 0:18:58.120 same year the first under My stress test was published, 0:18:58.160 --> 0:19:03.000 and they set out recommendations for corporations to publish more 0:19:03.000 --> 0:19:07.800 information on various particularly around their climate related risks and 0:19:07.840 --> 0:19:11.119 how they were managing climate related risks. And these recommendations 0:19:11.200 --> 0:19:15.919 actually included a recommendation to apply scenario analysis to identify 0:19:16.000 --> 0:19:18.240 what those risks might be over the short, medium and 0:19:18.320 --> 0:19:21.639 long term. And the TCFD recommendations have evolved the bit 0:19:21.720 --> 0:19:26.200 since then. They have been formalized by the International Sustainability 0:19:26.200 --> 0:19:29.040 Standards Board, the ISSB, who has actually merged with the 0:19:29.040 --> 0:19:32.760 TCFD or vice versa, and has published a more formalized 0:19:32.800 --> 0:19:36.639 set of reporting requirements which have been formally adopted by 0:19:36.760 --> 0:19:41.240 jurisdictions across the world, which require companies, financials and non 0:19:41.240 --> 0:19:45.000 financial companies to disclose on their climate related risks and 0:19:45.240 --> 0:19:48.800 implicitly or explicitly, there's an askut in there, depending on 0:19:48.800 --> 0:19:50.640 the jurisdiction that is, but there's an askut in there 0:19:50.680 --> 0:19:54.720 to apply scenario analysis to identify those risks. So we've seen, 0:19:54.960 --> 0:19:57.600 if you will, a kind of trend of private sector 0:19:57.920 --> 0:20:02.240 scenario analysis in peril level to the more broader central 0:20:02.280 --> 0:20:07.560 bank exercises. So that's been helping further establish climate stress 0:20:07.560 --> 0:20:10.399 testing as a discipline across the world. Now, what we 0:20:10.480 --> 0:20:13.520 did notice with the Trump administration coming in is that 0:20:13.600 --> 0:20:16.760 the SEC which was set to mandate such a climate 0:20:16.800 --> 0:20:19.640 disclosure rule in the US, has currently stopped their efforts 0:20:19.640 --> 0:20:22.280 to get that rule across It was already being contested 0:20:22.280 --> 0:20:26.199 in a number of US courts and in Canada the 0:20:27.119 --> 0:20:30.399 regulator had a similar climate disclosure requirement that they were 0:20:30.440 --> 0:20:33.800 about to bring into force. And they've actually pressed pause 0:20:33.880 --> 0:20:36.320 on that in response to developments in the US. It 0:20:36.359 --> 0:20:38.760 seems so we do see a bit of a setback 0:20:38.800 --> 0:20:41.040 there as well. But a final thing I just quickly 0:20:41.080 --> 0:20:43.760 want to mention is that during all of these years 0:20:43.760 --> 0:20:47.080 of capacity building, my sense of the industry is that 0:20:47.080 --> 0:20:51.680 there's been a growing intrinsic appreciation of the risks brought 0:20:51.720 --> 0:20:54.480 forth by climate change, and as Tiffan pointed out, especially 0:20:54.480 --> 0:20:57.119 the physical risks which are which are very visible in 0:20:57.160 --> 0:21:00.520 some jurisdictions, and you know, with very real con sequences 0:21:00.560 --> 0:21:04.320 that we can see today financial consequences as well as others. 0:21:04.359 --> 0:21:07.840 And so even though the regulatory push in Americas may 0:21:07.880 --> 0:21:11.280 subside somewhat, I think that might be compensated in part 0:21:11.359 --> 0:21:16.479 by an innate push by institutions to manage these risks regardless. 0:21:16.080 --> 0:21:18.800 I mean an innate push by the climate itself. You 0:21:18.800 --> 0:21:21.840 could say, just force financial institutions to think about this. 0:21:22.080 --> 0:21:24.440 I mean, just on that, you know, the governmental level, 0:21:24.680 --> 0:21:26.800 things have changed. At a federal level. One of the 0:21:26.840 --> 0:21:29.359 things there's always been a narrative in the US is 0:21:29.680 --> 0:21:31.840 whatever's happening at a federal level, you need to look 0:21:31.840 --> 0:21:33.880 at what the states are doing, do we see any 0:21:33.920 --> 0:21:36.480 activity at a state level in terms of climate stress 0:21:36.480 --> 0:21:37.720 tests in the US. 0:21:37.680 --> 0:21:40.399 So on our side, we haven't captured any state level 0:21:40.640 --> 0:21:44.639 stress tests. But it's important to note that across the 0:21:44.760 --> 0:21:49.560 US some states now stepping up to put together structures 0:21:49.640 --> 0:21:53.119 to support the insurance market. And so this is something 0:21:53.160 --> 0:21:56.119 we see across a number of states where public money 0:21:56.400 --> 0:22:00.840 is going to come to support locally some future homeowners 0:22:00.920 --> 0:22:03.320