Climate Risk Strategy program

Climate-related risks are the potentially adverse direct and indirect impacts on the Group’s financial metrics, operations or reputation due to transitional or physical effects of climate change. Climate-related risks could manifest themselves through existing risk types such as credit risk, market risk, non-financial risk, business risk or reputational risk. Beside risks, the measures required for addressing climate change and the materials and technologies necessary for the transition towards lower-carbon operations and products present various financing, investment and advisory opportunities across all our divisions.

In 2018, we established a climate change program to address the TCFD recommendations with respect to external disclosures on climate-related risks and opportunities. In 2019, we integrated our TCFD adoption program into a Group-wide Climate Risk Strategy program to deliver on the first prong of our approach to addressing climate change and climate-related risks. The mandate of this program is to develop comprehensive strategies to address climate risk. This includes supporting our clients’ energy transition towards low-carbon operations, technologies and services, continuing the ongoing implementation of the TCFD recommendations as well as working towards the implementation of various industry recommendations and compliance with upcoming regulatory expectations. This program is sponsored by the Chief Risk and Compliance Officer (CRCO) and has senior management representation from our business divisions as well as from General Counsel, Risk & Compliance and the new Sustainability, Research & Investment Solutions function.

As part of our strategy, we have developed sector-specific Client Energy Transition Frameworks (CETFs). They consist of the identification of priority sectors/industries and a methodology to categorize clients that operate in these sectors according to their energy transition readiness. With this approach, we aim to actively encourage clients to transition along the CETF scale over time and to support them through financing and advisory services. At the same time, we aim to manage Credit Suisse’s business and reputational risk exposure by assessing clients against the relevant CETFs before transacting with them. Financing for clients with the lowest categorization in terms of transition readiness, i.e. of “Unaware” clients, will be phased out over time. To date, we have rolled out CETFs for the highest priority sectors, such as oil and gas, coal mining and utilities/power generation (fossil fuel-based). Other sectors for which we are developing or planning to develop CETFs include shipping, aviation, commodities trade finance as well as manufacturing, construction/real estate, agriculture and forestry.

We have continued evolving risk identification processes following the guidance and examples outlined in the TCFD recommendations. We enhanced the mapping of the climate-related risks to existing risk categories by interacting with the regional and divisional teams. Based on the inputs received, we created a list of key items covering both physical and transition risks. This list aims to form an initial view that highlights the most material climate-related risks and their manifestations relevant to our risk management activity.

Adopting an enterprise view, we have identified key risks associated with climate change (refer to chart). We consider these risks against three different time spans of short term, medium term and longer term.

The identification of risks stemming from climate change is an ongoing process and we expect the granularity of the analysis to increase over time and be informed by our work on scenario analysis and stress testing.

We actively engage in industry forums to foster the development of industry standards. We have contributed to the development of transition risk and physical risk assessment models as part of the UN Environment Programme Finance Initiative phase II banking pilot. Through this engagement we have developed “heat maps” for the industry sectors most vulnerable to the transitional and/or the physical risks of climate change over the next three decades. Transition risks can arise from the process of adjustment towards a low-carbon economy through changes in climate policy, technological developments and disruptive business models, and shifting investor and consumer sentiment. Transition risks through climate change regulation, such as the introduction or increase of carbon prices or taxes, expected viability of low-carbon fuels or technologies and shifting consumer demand, were the key factors taken into account. Companies with carbon-intensive operations and production methods, or with carbon-intensive products, are expected to be most affected by these developments if they do not succeed in diversifying or transitioning towards lower-carbon operations and products. Pressure points from the physical risks of climate change arise primarily if a company’s operations (or those of its key suppliers or shipping routes) are in areas significantly affected by extreme weather events that are expected in increasing frequency in the future. These could include droughts or heatwaves leading to fires as well as flooding from heavy rains or from rising sea levels.

We also assessed climate-related risks by applying physical and transition models to our portfolios, starting with pilot exercises. The physical risk assessment focused on the flooding risk for the real estate portfolios financed by Credit Suisse. We covered the Swiss real estate portfolio and the UK portfolio, mapping property addresses to current flood risk maps. The results from this pilot exercise indicated a limited loss potential, mainly as a function of the maturity of our loans, vis-à-vis the longer-term nature of physical risk. The transition risk pilot covered the oil and gas portfolio financed by Credit Suisse. The results indicated that although the change is limited in the short term, it accelerates at an exponential rate and could be significant over the longer term.

Together with other banks, we participated in the Paris Agreement Capital Transition Assessment (PACTA) pilot project to test methodologies for measuring the alignment of credit portfolios to the objectives of the Paris Agreement developed by the 2° Investing Initiative. The analysis covered upstream oil and gas, coal mining and power generation portfolios financed by Credit Suisse. The pilot provided useful insights into the ways the alignment and diversification of a portfolio in terms of exposure to physical assets could be measured and monitored.

PACTA methodologies provide two main types of output:

• The alignment of the evolution of exposure over time to climate scenarios
• The diversification of a portfolio at a point in time in terms of exposure to physical assets

With respect to the alignment to climate scenarios, oil and gas portfolios demonstrated decarbonization trajectories comparable to projections for the global corporate economy, with certain parts of the portfolio outperforming those projections. The technology mix of the power generation portfolio financed by Credit Suisse was found to be less carbon-intensive than the global corporate economy.

In Switzerland, Credit Suisse participated in the voluntary climate alignment test of investment portfolios and Swiss mortgages for Swiss banks, asset managers, pension funds and insurance companies coordinated by the Swiss Federal Office for the Environment. We published the summary of our individual results, as one of the few participating banks to do so.