Climate and ESG Risk

@OP

In my experience, it typically depends on the bank's approach to the override:

Pre-calibration would typically be included if they are trying to include is as an statistical predictor of risk: i.e. you have some historical information that help you calibrate the specific weight and you only include the override if it increases the predictive ability of the model

Post-calibration if they want it to be a “penalization” mechanism for management (however this will not be fully compliant with EBA calibration guidelines for the use of overrides in IRB models)

I have seen the following:

Percentage of the Business/Institutional portfolio in high transition risk sectors Proportion of the mortgage portfolio exposed to high physical risks (by 2050 under a 4-degree warming scenario is one specific example). Believe this is based on property level assessment and then some % increase in PD. Some reputational ones around ESG scores

However, I don’t believe anyone would set the thresholds at a level that would likely be binding. So skeptically, I think this is just for reporting and transparency at the moment – which is probably right given the limitations of climate risk modeling