Since the Paris agreement of 2015, climate change has received increased focus from the public as well as legislative and regulatory bodies. Corresponding actions and initiatives of European institutions towards a greening of the financial industry have also led the supervisory authorities to put increased attention on climate-change related risks for the financial sector.
In the context of Solvency II this awareness implies the need for quantitative assessments of climate change related risks at least within pillar 2 (ORSA). For Internal Model Users even an integration into pillar 1 seems indispensable for the near future. Both facets raise the question of how exactly climate risk can be estimated within risk capital calculations.
In this web session a practical approach to measure climate change related risk within asset portfolios is presented. It is both, applicable for ORSA assessments, and suited for integration into the internal model market risk modules. The concept is developed reflecting recent regulatory opinions on environmental impacts and based on cutting-edge research standards which are pragmatically integrated into risk measurements under Solvency II.After discussing general principles and paradigms regarding the valuation of climate financial risks, a scenario-based quantification scheme for the asset portfolio impact of climate risk is developed. Additionally, a realistic case study is presented, illustrating the approach and estimating the effects and impacts on the market risk capital calculations.