InsuranceERM's Global Climate Risk & Sustainability Awards

Climate stress-testing solution of the year: Conning Climate Risk Scenarios and Climate Risk Analyzer

Conning wins the award for climate stress-testing solution of the year for an innovative climate economics model combined with software that helps insurers with one of their most important tasks: understanding the financial market impacts of climate change.

The climate economics model enables users to generate scenarios that capture both physical and transition risks, and how they interact. Through a collaboration with university researchers, Conning developed a class of probabilistic damage functions, which captures potential climate impacts on financial markets, including "tipping points", i.e. abrupt, severe and irreversible changes in the climate.

By including these scenarios in the model, Conning has shown potential material climate-related risks materialising in asset allocations in the next five to 10 years, "making them more relevant to typical reporting risk horizons than many standard scenarios". The firm also produced scenarios to help firms respond to the Bank of England's Climate Biennial Exploratory Scenario (CBES) exercise.

The climate economics model and CBES-aligned scenarios have been designed to be used as input to the Conning Climate Risk Analyzer, a software-as-a-service tool which enables stochastic climate scenario analysis to be performed on existing asset allocations. Among the innovations is a new analytic, "excess climate risk", which quantifies the physical and transition risk in an asset allocation relative to a benchmark.

Via its intuitive app-like interface, Climate Risk Analyzer allows users to investigate different paths that a given climate scenario could take, as well as grasp a scenario's impact on the risk metrics of a portfolio at different time horizons.

The judges commented Conning had developed a "focused solution" for understanding the financial markets impacts of climate change, and commended the company for backing up its scenarios with science.

The panel noted how the firm has "taken deterministic regulatory approaches to the next level, allowing stresses at a percentile level and allowing the combination of physical and transition risks. This is a really positive move, taking stress testing from 'something we need to do' to a key risk management discipline."