The Climate Extended Risk Model (CERM)

TL;DR

The paper introduces the Climate Extended Risk Model (CERM), a framework that integrates physical and transition climate risks into credit risk assessments for bank portfolios, enabling more comprehensive loss estimations.

Contribution

It presents a novel adaptation of existing credit risk models to incorporate climate-related risks, providing a detailed methodology for calculating climate-induced credit losses.

Findings

CERM effectively quantifies climate-related credit risk impacts.

The model allows incremental loss estimation considering physical and transition risks.

It offers a practical approach for banks to integrate climate risk into credit portfolios.

Abstract

This paper addresses estimates of climate risk embedded within a bank credit portfolio. The proposed Climate Extended Risk Model (CERM) adapts well known credit risk models and makes it possible to calculate incremental credit losses on a loan portfolio that are rooted into physical and transition risks. The paper provides detailed description of the model hypotheses and steps.