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BLOG. 2 min read

Manage Climate-Related Financial Risks with an Integrated Approach

Climate risk management is recognized as a top priority by public and private players globally. Financial firms, including banks, pension funds and investment funds, asset management and insurance groups, are at the forefront of this endeavor to cope with rising reputational and regulatory pressures.

As a major provider of financial risk management software, Algorithmics is working to deliver the best product to manage climate risks, with two main objectives in mind:

  • Ensure that the solution incorporates advanced research findings and best practices dictated by international organizations and supervisory authorities.
  • Integrate climate risk quantification into a production-level risk management framework to assess and analyze financial risks holistically.

Climate research is a rapidly changing field, where specific knowledge and constant effort are required. To comply with our guiding principles, we joined forces with the leading experts in this matter, entering a strategic partnership with CLIMAFIN.

CLIMAFIN is a fintech that provides science-based solutions for climate financial risk assessment and management. It was founded by three of the world's leading experts on climate risks: Stefano Battiston (Professor of Economics at Univ. Ca' Foscari of Venice and of Sustainable Finance at Univ. of Zurich), Antoine Mandel (Professor of Applied Mathematics at the University of Paris I Panthéon-Sorbonne), and Irene Monasterolo (Professor of Climate Finance at Utrecht University).

The CLIMAFIN team has developed reference models in the scientific community for the assessment of climate financial risks, combining the analysis of large and granular datasets on financial and industrial relationships with new algorithms to estimate the propagation of climate shocks and their resulting impacts on financial assets.

The CLIMAFIN team has supported several central banks, financial regulators and development finance institutions in climate financial risk assessment. Currently, CLIMAFIN is in charge of the development of the short-term scenarios for the Network for Greening the Financial System (NGFS). Its methodology is featured by the UN Principles for Responsible Investment and by the UN Environment Programme Finance Initiative, and it has been used by a range of global financial authorities including the European Central Bank, the Swiss Financial Market Supervisory Authority, the Monetary Authority of Singapore and the World Bank. CLIMAFIN also offers advisory services to governments and private firms worldwide.


Figure 1. Functional design of CLIMAFIN's model

“The combined offering of CLIMAFIN and Algorithmics leverages state-of-the-art data and models on climate-related financial risks within an integrated, high-performance simulation environment. It allows financial actors to timely monitor their exposures and make sustainable investment decisions” says Battiston.

The solution enables users to quantify the correlated effect of market movements and climate stresses on a firm’s portfolio, and their impact on market and credit risk calculations. Precise risk contributions stemming from the different factors shall be accounted for, with a scenario-based approach to risk aggregation and portfolio construction.

To find out more, contact us.

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