On November 11, International Institute of Green Finance (IIGF) of Central University of Finance and Economics (CUFE) and Natural Resources Defense Council (NRDC) jointly held a seminar on “Environmental and Climate Risk Assessment and Stress Testing Methods and Applications”. The seminar was held online and invited professionals, practitioners, and experts from the People’s Bank of China, the National Center for Climate Chang Strategy and International Cooperation, Industrial and Commercial Bank of China, Postal Savings Bank of China, China Energy Investment Group, China Electricity Council, The Research Institute of Safety & Environment Technology of the China National Petroleum Corporation (CNPC). The panel of experts conducted in-depth discussions on the methods, applications and challenges of the environmental and climate risk assessment and stress testing.
The seminar was organized under the project jointly launched by IIGF and NRDC: “China Green Finance Mainstreaming and Accelerating Low-Carbon Transition,” which aims to explore China’s green finance development trends, opportunities, and challenges of enterprises’ low-carbon and green transition under the dual-carbon goal, and provide guidance and reference for all stakeholders to improve their risk management strategies.
The purpose of the seminar was to provide a platform for collecting various perspectives on possible pathways to carbon neutrality and promote the application of environmental and climate stress testing by financial institutions. The seminar created an excellent opportunity to provide suggestions on improving the accuracy and consistency of environmental and climate risk assessment and climate risk management capabilities of financial institutions. Mao Qian, Director of the International Cooperation Department of the IIGF, moderated the seminar.
Professor Wang Yao, Director General of IIGF, and Zhang Jieqing, Country Director，NRDC China delivered the opening speeches for the seminar.
Professor Wang Yao underlined that environmental and climate risks are the focus of financial regulators, financial supervisors, and financial markets. The green development of industries through the application of green finance and the low-carbon transformation and upgrading of traditional high-emission industries are also essential assessment aspects of environmental and climate risk management.
Director Zhang Jieqing in her speech highlighted that achieving the climate goals require a large amount of investment. Scaling climate financing was one of the main focus areas during COP26, and it has also become the top priority in advancing efforts of achieving the dual-carbon goal. In recent years, with the rapid development of green finance in China, financial institutions have paid increasing attention to environmental and climate risk management and environmental information disclosure.
Yang Ping, head of the Financial Market Division, Research Bureau of the People’s Bank of China, gave a speech about introducing financial institutions’ progress in environmental and climate risk management. She also shared thoughts on managing environmental and climate risks of financial institutions.
Chai Qimin, Director of the Strategic Planning Department of the National Center for Climate Change Strategy and International Cooperation, presented his interpretations on the key documents and policies recently issued by the state, such as the ” Working Guidance For Carbon Dioxide Peaking And Carbon Neutrality ” and the “Action Plan for Carbon Dioxide Peaking Before 2030”. He also stated that the joint release of the “Sino-U.S. Glasgow Joint Declaration on Strengthening Climate Action in the 2020s” will play an important role in promoting bilateral climate change cooperation and global multilateral processes.
Professor Shi Yichen, Deputy Director of IIGF, presented and analyzed the results of the “China Green Finance Mainstreaming and Accelerating Low-Carbon Transition Project” jointly carried out by IIGF and NRDC. He pointed out that the research uses sensitivity analysis under different scenarios to evaluate the impact of various factors on the results when adverse changes occur. In the model setting, the Capital Asset Pricing Model (CAPM) is applied to measure individual stocks’ expected rate of return, and it incorporates environmental risk factors. To measure value at risk, the impact of environmental and climate risks on the investment rate of return of the asset portfolio is quantitatively calculated. In the empirical analysis part, the environmental stress testing methodology is applied to measure the environmental risks for the two companies, a domestic traditional fossil energy company and a domestic financial institution. The research also measures the impact of environmental factors on the company’s financial performance and financial market operations.
Prof. Shi also highlighted several existing challenges:
- the scarcity of scientific and practical analysis models and tools for the environmental and climate risk assessment;
- the availability of data related to environmental and climate risk exposures is relatively low;
- the evidence on which scenario assumptions and sensitivity are based is insufficient;
- the foundation for conducting environmental and climate stress testing is incomplete.
The recommendations include:
- Improve the planning of methodology for the environmental stress testing of financial institutions and the construction of functional institutions,
- Promote the standardization of evaluation systems, and developing diversified financial tools.
The seminar also invited Yin Hong, Deputy Director General of the Modern Finance Research Institute of Industrial and Commercial Bank of China, Chen Huimeng, Deputy General Manager of the Credit Management Department of Postal Savings Bank of China, and He Zhenfu, Professor-level Senior Engineer and Director of the Investment Relations Division of the China Energy Investment Group, and Zhang Weidong, Director of the Reform Division of the Ministry of Industry Development and Environment and Resources of China Electricity Council, and Wang Shumei, Senior Engineer at the Research Institute of Safety & Environment Technology of CNPC. In addition, a number of experts from financial institutions, industry associations, leading companies, and research institutions had in-depth communication on the methods, applications, and challenges of financial institutions and companies to implement “environmental and climate risk assessment and stress testing.” Based on their industry characteristics and practical experience, they put forward many suggestions for the next step of the project. Wu Qi, director of the Environmental Law and Governance Project of NRDC, moderated the panel.
In his concluding speech, Professor Shi Yichen pointed out that carrying out environmental and climate stress testing is critical for financial institutions and enterprises to improve their own sustainable development. Future environmental and climate risk assessment and stress testing methods will need to draw on the collective wisdom of financial institutions and enterprises. It is also essential to improve the comparability of scenario settings, data quality, infrastructure construction, personnel training, etc. Ultimately, these efforts will improve the methodology of the environmental climate risk assessment system and comprehensively improve the stress testing applications.