The spectre of climate change looms large over the global financial system. Extreme weather events and the inevitable transition to a low-carbon economy pose unprecedented financial risks to banks and other financial institutions. Recognising this danger, central banks and financial authorities globally are striving to integrate climate risk into their supervisory frameworks. However, this task is riddled with challenges, ranging from nascent methodologies to fragmented and incomplete data.

Addressing some of these key challenges is Project Viridis, an initiative developed by the Bank for International Settlements Innovation Hub Singapore Centre in collaboration with the Monetary Authority of Singapore. This innovative tool integrates climate-relevant geospatial data to provide qualitative assessments of climate risks, supporting financial authorities in identifying, monitoring and managing these risks within the financial system.

Climate-related financial risks are multifaceted. They encompass both physical risks (arising from extreme weather events and long-term climate shifts) and transition risks (stemming from the shift towards a low-carbon economy). Traditional risk management approaches often fail to capture these complexities, leaving financial institutions vulnerable.

Project Viridis addresses this challenge by offering a tool that consolidates various data sources into clear visual representations, allowing for a more targeted assessment of climate exposures.

Building on a strong foundation

Project Viridis builds on the Ellipse Data and Knowledge Platform, developed by the BIS Innovation Hub Singapore Centre and MAS under Project Ellipse*. EDKP's architecture supports the integration of structured and unstructured data from multiple sources. This foundation enables Viridis to provide comprehensive visualisations of climate risks across different sectors and regions. It has the following key features and capabilities.

Emissions data visualisation: The tool consolidates emissions data from counterparties of financial institutions, allowing supervisors to gauge the carbon footprint of supervised entities. This includes both reported and modelled emissions, offering a clear representation of potential climate exposures.

Geospatial mapping: Viridis maps out the geographical distribution of a firm’s assets and augments the geospatial map with indicators of physical hazard risk. This feature identifies vulnerabilities to physical climate risks, such as floods or heatwaves, supporting more comprehensive risk management strategies.

Scenario analysis: The tool also facilitates forward-looking assessments of climate-related financial risks under various climate scenarios. By consolidating carbon pricing policies and information on the jurisdictions of operations, financial authorities can better understand the long-term viability of banks’ counterparties under different carbon price trajectories.

Systemic risk visualisation: Project Viridis facilitates the identification of systemic risks by highlighting overlapping risk concentrations across multiple institutions. This consolidated view helps authorities anticipate and mitigate system-wide vulnerabilities.

User-friendly interface: The tool offers interactive visualisations and data export capabilities, making it accessible and practical for financial supervisors. Its modular design ensures adaptability, allowing for the integration of new data sources and methodologies as they become available.

The crux of Viridis lies in its pragmatic approach. Recognising the inherent limitations of existing data and metrics, it leverages currently available information to provide a ‘roughly right’ qualitative assessment of climate risk exposures. This approach prioritises transparency and emphasises supervisory judgment in interpreting visualised results and engaging with supervised entities.

Built on the modular architecture of the EDKP, Viridis integrates regulatory exposures with a range of climate data. This enables supervisors to get a triangulated view of risk, encompassing various dimensions of climate exposure.

Future directions and impact

Project Viridis does not profess to solve the complex challenges of climate risk assessment overnight. Data gaps and methodological uncertainties remain hurdles. Yet, it represents a vital step towards building a more resilient and climate-conscious financial system.

By consolidating climate-relevant data and metrics, it provides financial authorities with the insights needed to engage meaningfully with supervised entities in the management of climate-related financial exposures. As the tool continues to evolve, further enhancements will expand its capabilities to enable it to keep up with the rapidly changing technological environment.

In conclusion, Project Viridis represents a significant advancement in the ability of financial authorities to manage climate-related financial risks. It lays out the blueprint for a tool that integrates and visualises various data sources, while highlighting the importance of assessments that are forward-thinking in nature and take into account adaptive and mitigative strategies. Viridis sets out how financial authorities can meaningfully help supervised entities to enhance the climate resilience of the financial system.

 

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Project Ellipse explores how technology solutions could enable supervision to be more forward-looking, insights-based and data-driven, using an integrated regulatory data and analytics platform. The Ellipse prototype combines both structured and unstructured sources of data that are relevant to current events in real time. Advanced analytics are then applied to those integrated data sources to provide supervisors with early warning indicators, analytics and prudential metrics. BISIH Project Ellipse Report.