  This paper is directed to the financial community and focuses on the
financial risks associated with climate change. It, specifically, addresses the
estimate of climate risk embedded within a bank loan portfolio. During the 21st
century, man-made carbon dioxide emissions in the atmosphere will raise global
temperatures, resulting in severe and unpredictable physical damage across the
globe. Another uncertainty associated with climate, known as the energy
transition risk, comes from the unpredictable pace of political and legal
actions to limit its impact. The Climate Extended Risk Model (CERM) adapts well
known credit risk models. It proposes a method to calculate incremental credit
losses on a loan portfolio that are rooted into physical and transition risks.
The document provides detailed description of the model hypothesis and steps.
This work was initiated by the association Green RWA (Risk Weighted Assets). It
was written in collaboration with Jean-Baptiste Gaudemet, Anne Gruz, and
Olivier Vinciguerra (cerm@greenrwa.org), who contributed their financial and
risk expertise, taking care of its application to a pilot-portfolio. It extends
the model proposed in a first white paper published by Green RWA
(https://www.greenrwa.org/).
