Climate risk Assessment Process
Piraeus Bank uses it propriety Climabiz 2.0 tool, to assess in monetary terms, the climate risk derived from the Bank’s business borrowers. 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). Given the variety of different characteristics between economic sectors/sub-sectors, for the estimation of climate related risks, 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 a specific economic sector / sub-sector.
To assess climate related risks, the Climabiz 2.0 tool uses climate scenarios, which simulate climate risks for different geographical areas of the country, both for the historical (period 1971-2000) and the future (period 2021-2050) climate.
The Climabiz 2.0 tool includes a set of RCP climate scenarios as well as the very low emissions scenario SSP1 – 1.9, each offering a plausible and internally consistent description of the future:
- SSP1-1.9 this very low GHG emissions scenario, CO2 emissions reach net zero around 2050 and the best-estimate end-of-century warming is 1.4°C. It falls under the sustainability narrative of the “Shared Socioeconomic Pathways” (SSPs). According to this narrative the future world shifts toward a more sustainable path where consumption is oriented toward low material growth and energy intensity. SSP1-1.9 focuses on limiting warming below 1.5C in line with the goal of the Paris Agreement.
- RCP2.6 is a "very stringent" pathway and aims to keep global warming likely below 2°C by 2100.
- The intermediate IPCC stabilization scenario RCP4.5, is more likely to result in 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 that exceeds 4°C.
In the context of the assessment Piraeus leveraged the Shared Socioeconomic (SSP) and the Representative Concentration (RCP) Pathways adopted by the Intergovernmental Panel on Climate Change (IPCC), namely the SSP1-1.9 for transition risk (1.5°C aligned scenario) and RCP 8.5 for physical risk, and its proprietary tool for the quantification of climate risk (Climabiz 2.0). The SSP1-1.9 scenario assumes international cooperation with emphasis on the well-being associated by technological innovation for climate change mitigation. The RCP 8.5 is a high emissions scenario that assumes increases of 4°C or more above pre-industrial levels by the end of the century. The endpoint of the long-term horizon in the scenario analysis was set in 2050. The two scenarios capture the two different extremes in terms of climate change mitigation and thus provide a wide range of possible loss-making events.
Main climate risk categories assessed with Climabiz Tool
A. Physical Risk: Ιs the financial impact that a company may have due to the change of climatic conditions, owing to either long-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 into 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.
Considering the large number of risk components during the climate risk calculation with the Climabiz 2.0 tool, 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 Identification
The Group defines climate risks as the potential negative impacts on an institution’s financial health by climate change factors such as extreme weather events. The identification process considers both the downstream value chain and own operations climate-related risks as follows:
- Physical risks, which refer to the potential financial losses a counterparty may face due to the changing climate patterns. These changes may be due to long-term alterations in climate patterns, referred to as chronic, or an increase in the number and severity of extreme events, often classified as acute.
- Transition risks, which refer to the extra costs that a counterparty may encounter as it adapts to a carbon-neutral economic model. These risks are triggered by regulatory changes (policy and legal), the integration of new low-carbon technologies, shifts in market conditions, consumer preferences, and more.
The Group has conducted an analysis to determine the materiality of the impact of climate related risks on its main risk categories. The list below presents the climate risk drivers as identified and included in the business portfolio assessment, which can be materialized according to the recent Climate and Environmental Risk Materiality Assessment.
| Transition Risks |
| Environmental taxation and subsidies |
| Regulatory requirements (e.g., sustainability certificates, disclosures) |
| Behavioral changes of consumers, suppliers, employees |
| Technological developments |
| Energy transport policies (e.g. reduction of CO2 emissions) |
| Physical Risks |
| Heat waves and wildfires |
| Droughts |
| Floods |
| Storms |
| Changing rainfall patterns |
| Extreme precipitation |
| Storms and storm surges |
| Water stress |
Climate Risk Assessment
The Bank estimates through the Climabiz 2.0 tool, the climate related risks (both physical and transition) of its business borrowers (bottom-up approach) based on their general operational and technical features (i.e. field of activity), for those economic sectors considered to be mostly affected by climate change and translates climate change impact to monetary terms.
The calculation methodology is based on the utilization of three climatic Representative Concentration Pathways (RCP) scenarios and the SSP 1.9 scenario from the the IPCC (Intergovernmental Panel on Climate Change).
The key differences concerning the climate risk outputs between the climate scenarios are primarily attributed to the fluctuations of the transition risk components, with major driver the carbon emissions allowances prices. For the cost of direct and indirect emissions, three different prices of carbon emission allowances €/tCO2, for each of the decades 2021-2030 / 2031-2040 /2041-2050 were used, per each climate scenario:
|
Carbon price used for SSP 1.9 (€/ TCo2) |
Carbon price used for RCP 2.6 (€/ TCo2) | Carbon price used for RCP 4.5 (€/tCO2 | Carbon price used for RCP 8.5 (€/tCO2) | |
| 2021-2030 | 220 | 80 | 68 | 25 |
| 2031-2040 | 464 | 173 | 80 | 23 |
| 2041-2050 | 782 | 365 | 135 |
20 |
Piraeus seeks to improve its climate and environmental due diligence processes, both at the start of a customer relationship and on a regular basis. The aim is to establish the necessary procedures to collect and verify the climate and environmental information needed to assess the borrowers' vulnerability exposure to those risks, notably before entering into a loan agreement. Piraeus has also integrated the Climabiz 2.0 climate risk results and climate & environmental risks into the loan evaluation process and pricing. The 2024 Annual Financial Report includes the necessary information regarding outputs for the Climate and Environmental (C&E) Risks Materiality Assessment.
For further information please click here.