Viewpoint: Incorporating Climate Tipping Points into Regulatory Scenario Analysis

Conning Viewpoint
Tipping points are critical thresholds in the climate system where sudden changes can lead to dramatic environmental shifts. These non-linear changes trigger feedback loops that will amplify warming rates, making climate impacts more severe and challenging to reverse. The current state of climate science does not enable us to predict the timing and magnitude of the impacts of crossing these thresholds. However, ignoring such tipping points in financial institutions’ climate risk assessments could lead to inadequate preparedness for the future.

In this paper, Conning builds on its previous work and discusses a new approach to incorporating tipping points into a probabilistic simulation model. The paper also provides examples of how such a simulation will behave for two specific tipping points within a model. Utilizing this approach, risk practitioners can begin to quantify the potential financial impact of climate tipping points and try to predict their effect on the asset classes in which financial institutions invest.

Request your copy
Incorporating Climate Tipping Points into Regulatory Scenario Analysis