Physical Risk Banking Case Study
Spectra supports major European bank in its stress testing and backbook analysis, yielding a better-informed commercial strategy.
The solution was chosen due to a number of factors, including accuracy, breadth of offering and Climate X’s deep understanding of the financial services industry, combined with flexible and scalable technology. The client is now considering baking Spectra into its climate-related activities.
The European Tier 1 Bank Adopts Climate Risk Data
Full-service Tier 1 digital bank with a heritage stretching over 180 years. They enjoy a globally recognised brand and are listed on the London Stock Exchange. Their focus is primarily on retail, business banking and agriculture.
A Growing Challenge
The customer approached Climate X as they searched for a provider offering high-resolution and high-accuracy climate risk data as part of their backbook commercial analysis and a regulatory stress test. Such exercises have become a new norm in Europe and APAC regions, and are extending globally, including US banks under the Federal Reserve.
The customer was also dissatisfied with their heritage provider as well as open source data – both lacked critical hazards in their library, e.g. subsidence and failed to perform well when benchmarked against respective environmental agencies.
Should the customer continue with a status quo, they could be forced to raise a higher provision for potentially unaccounted exposure - or worse - risk regulatory intervention.
Building a Decision-Ready Solution
The customer chose to use cVAR (climate Value at Risk) loss data from Climate X Spectra. Their focus was on flooding, storms, subsidence and extreme heat, including underlying assumptions on assets’ size, replacement cost, age and roof/wall materials.
The data was delivered under several emissions pathways (RCPs and SSPs) at 5-yearly intervals until the end of the century. Spectra also provided them with the functionality to visualise different types of flooding, both with and without defences.
of physics
data points
of infrastructure
mapped assets
of coastline
perils
Why the customer chose Climate X
Spectra was ultimately a clear choice following an extensive due diligence process. We topped in all five of their scoring categories:
- Breadth of offering: Climate X provides an extensive physical and transition risk library as well as associated losses and adaptation measures deployed through AWS’s global infrastructure.
- Data quality: With strict benchmarking and Model Risk Management practices in place.
- Sample portfolio analysis: Value add Proof of Concept.
- Commercial partnership: enabling flexible terms.
- Size/scale: Our financial services and real estate expertise are reflected in our top-tier customers from these industry verticals.
The Results and Benefits
The benefit to the Bank was threefold. Most importantly, they understood which specific properties in their close to 0.5m portfolio were at risk. This has been followed by a $ provision quantification and a deep rethink of business strategy, e.g. which postcodes to continue lending to or where to encourage retrofitting and infrastructure climate adaptation.
In addition, they met their regulatory and various disclosure requirements and, finally, satisfied their board and shareholders.
The Next Steps
The Tier 1 Bank's climate risk journey doesn’t end here. We’re now assessing incorporating Spectra into their mortgage underwriting, building on the work completed to date. On this occasion, the Bank intends to utilise Spectra's Enterprise APIs to facilitate real-time assessment of each mortgage application as customers request new banking products.
The scope of the assessment is also broader, taking into account more asset parameters like its adaptive capacity or actual CO2 emissions. We’re very excited to share this next endeavour.
About Us
Climate X is a multi-award-winning company established with one goal: to deliver data and analytics that will help build resiliency to the impacts of climate change on societies worldwide.
Our strategy’s cornerstone is providing best-in-class physical climate risk insights for firms in the Financial Services industry (banks, insurers, investment managers & lenders such as credit mutuals or mortgage providers) and Real Estate (commercial & residential) with over $45tr in AUM.
In more detail, we enable firms to pinpoint, project, and quantify risks and losses associated with weather events, allowing them to create property-level business plans and inform their portfolio strategies. The data is provided via our Software-as-a-Service platform, Spectra, which can also be accessed via our API. Spectra has been recognised as not only innovative and ground-breaking but also industry-leading.
In recent months, we’ve won awards from Deloitte, E2E, Cog X, Digital Catapult, Founders Forum Group, GeoAwesomeness, Elite Business Awards, finalist in The Europas, and recognised as a Rising Star by Chartis.
Our Latest Articles & News
A selection of some of our latest articles covering industry, policy and climate science - written by us.
