As climate risk modelling becomes central to regulatory compliance and strategic planning, banks face increasing pressure to quantify physical climate risks in financial terms.
Capco partnered with a Global Tier 1 bank to help them respond to growing regulatory pressures by evaluating its climate data vendors, prioritizing those with functional integrity, asset-level granularity, and forward-looking methodologies to meet evolving regulatory standards.
The challenge
A Tier 1 bank engaged Capco to enhance its physical climate risk modelling capabilities to meet regulatory expectations. The bank faced several key challenges which limited its ability to meet the growing compliance standards and advance its internal model validation efforts:
- Existing vendor solutions lacked global asset-level coverage and did not support location-specific modeling required for accurate risk assessment.
- Widespread use of proxies, inconsistent documentation, and absence of model validation hindered compliance with internal risk models.
- Existing models lacked transparent, forward-looking financial loss functionality, limiting their effectiveness in forecasting climate related impacts.
- Rejection of the existing physical risk model (Template 5) by internal Model Risk Management Function (MORM)
Due to variability in vendor methodologies and documentation operations resulting in concerns around auditability and operational transparency.
Our approach
To address this challenge, Capco delivered a structured two-phase engagement to assess, validate, and operationalize climate risk modelling solutions. Drawing on cross functional expertise in risk, data and regulatory standards, the team applied a rigorous evaluation and testing framework including
- Market assessment: Conducted a market scan of sustainability data vendors based on the bank’s defined functional and non-functional criteria focusing on regulatory alignment & modelling capabilities.
- Stakeholder Engagement: Facilitated direct vendor outreach, live demonstrations, and in-depth data quality reviews to assess solution maturity and integration readiness.
- Scoring & Evaluation: Developed a weighted scoring matrix to benchmark vendors against key assessment dimensions.
- Case Study: Designed a standardised case study framework leveraging real-world exposure data to enable consistent comparison of financial loss outputs i.e. precise location coordinates, property valuation, defined hazard scenarios, and reference year.
- Model Testing: Tested vendor models across 7 hazard types, 8 climate scenarios, and 4 timeframes (2020–2100), ensuring comprehensive scenario coverage.
- Logic Validation: Embedded geo-specific “trap” assets to test model logic and accuracy.
- Regulatory Review: Assessed outputs for regulatory alignment, transparency and audit readiness.
Value delivered
The engagement yielded strategic and operational impact, enabling the client to make significant progress toward regulatory and internal validation goals. Key outcomes included:
- Strategic Decision Support: Capco delivered robust vendor comparison outputs enabling strategic data procurement for climate risk integration across business functions.
- Enhanced Financial Impact Methodology: the bank established a robust Financial Impact methodology built on asset-level data and loss functions, replacing the earlier score-based approach.
- Vendor Differentiation: we identified vendors whose capabilities aligned with regulatory expectations under PRA SS3/19 and SS1/23, equipping the client with defensible choices for future vendor onboarding and procurement.
- Validation-Ready Documentation: Capco developed comprehensive, audit-trail documentation of the case study process and results. This was submitted directly to the MORM team, supporting the ongoing validation of the Physical Risk Model demonstrating readiness for PRA scrutiny.