On Wednesday 21 April UK Finance hosted the second of the four-part ?COP 26 and Beyond? webinar series in collaboration with EY. The webinar, which was attended by 500 delegates, focused on climate risk management and stress testing. We were joined by three practitioner panellists, Daniel Klier of HSBC, Ben Carr of Aviva and Andre Abadie of JP Morgan - all three active within the Climate Financial Risk Forum (CFRF) - as well as three speakers from EY's sustainability and risk teams, Lionel Stehlin, Andre Correia dos Santos and Khadija Ali.

Lionel Stehlin began by introducing a conceptual framework for climate risk in the financial sector, noting how it differs from more 'traditional? risks; widespread in its impacts, long-term yet highly dependent on short-term action, and uncertain in its magnitude yet wholly foreseeable in its broad impact.

Lionel then described the sizeable pipeline of regulations regarding climate-related financial risk, which has moved in recent years from zero to voluntary initiatives to mandatory requirements. These new requirements are largely based on the Taskforce on Climate-related Financial Disclosures (TCFD) and on exploratory stress tests, which will be trialled in numerous jurisdictions this year.

This fast pace of regulatory developments presents both opportunity and risk. The pace opens the door for industry to help shape the regulatory debate, including through the CFRF, because regulators have too much to do and need help. At the same time however the pace raises the risk that firms will face a confusing and inconsistent landscape, highlighting the need for timely engagement.

Andre Correia dos Santos then set out the three scenarios at the heart of climate scenario analysis and stress testing; orderly transition, disorderly (i.e. late) transition, and a hot house world. He explained that the first is preferable, the second would result in the greatest transition risks being realised, and the third would result in the greatest physical risks being realised.

Andre then compared the three main stress testing exercises being run this year by the Bank of England (BoE), the French regulator (ACPR) and the Hong Kong regulator (HKMA), noting that they shared many similarities besides scope where the BoE's had the broadest sectoral coverage. Andre ended with a very detailed practical case study of a climate-related stress test that would be applied to a specific sector, using the example of the power sector.

The webinar then turned to the three practitioners to describe their experiences, including as key figures within the CFRF. Daniel Klier, who leads the risk management work within the CFRF, began by highlighting the importance of considering climate risk through three lenses: exposure to high carbon sectors, alignment to net zero, and management of climate risk.

Daniel then described some of the major initiatives which provide a core toolkit to help firms address these issues. These are notably the Partnership for Carbon Accounting Financials(PCAF) carbon accounting framework, net zero pathways provided by the Paris Agreement Capital Transition Assessment (PACTA) and the Science Based Targets initiative (SBTi), the Network for the Greening of the Financial System (NGFS) climate scenarios (which all the major stress tests will draw on), and the CFRF's own handbooks on topics such as disclosures and risk management.

Ben Carr set out the key messages from the CFRF's scenario analysis work to date, including the headline challenges. Ben noted that while there was no 'silver bullet? to address these, there was a huge amount of good work underway and he expected best practice to emerge rapidly over the coming years. He then announced that the CFRF will produce further industry guidance in the coming months, including a database of benchmarking tools, and welcomed any engagement in that process.

Andre Abadi then closed the practitioner panel by describing the CFRF's work on scenario analysis within banking specifically, looking at transition risk, physical risk and alignment with net zero through the lens of the oil and gas sector.

The playback can be accessed by registering here and you can access the third webinar in the series, which focused on TCFD Reporting - here.