Climate change research shapes the future of credit risk modelling and financial policy

Edinburgh Business School's Professor Patrycja Klusak has been actively engaged in shaping the future of credit risk modelling and financial policy through sharing her research with policymakers.

Her work, which centres on climate change, nature loss and adjusted credit ratings, has gained traction both in the media and amongst law makers, including citations from policy experts at the Whitehouse.

Reuters leveraged Dr Klusak's research to explain that mass biodiversity loss would slash global credit ratings.

"Biodiversity loss can hit economies in multiple ways," shared Professor Klusak.

"A collapse in fisheries, for example, causes economic shockwaves along national supply chains and into other industries."

Professor Klusak’s study builds on previous research that used AI to produce ‘climate smart’ sovereign credit ratings to show global warming downgrades as early as 2030.

In June, Professor Klusak was invited to speak at the Federal Reserve Board Washington, D.C. In her address, Professor Klusak spoke about the importance of incorporating biodiversity loss into main financial indicators. She warned that credit rating agencies can and should incorporate nature-related risks into rating methodologies to provide more accurate picture of nations’ wealth.

Professor Klusak said: "While climate change has recently dominated financial conversations, omitting the risks of nature loss could undermine market stability, bankrupt governments, and severely impact households."

Recently, she also chaired a discussion at the University of Cambridge's Econometric Models of Climate Change (EMCC) VIII Conference, hosted by Cambridge's #climaTRACES Lab of which she is a co-founder. During her session, Professor Klusak chaired important conversation around temperatures.

Earlier this week in Frankfurt, Professor Klusak delivered a workshop at the European Central Bank for senior level policymakers around integrating climate stress testing into credit risk modelling. The Deep Dive (DD) workshop provided participants with detailed knowledge of climate stress and climate stress testing and their impact on the financial sector.

In October, Professor Klusak will travel to the United Nations University Centre for Policy Research (UNU-CPR) in New York, where her role as a panellist expert will shape the future of policy debate. At this workshop, the UNU-CPR will promote a cross-regional exchange of perspectives on the role of credit rating agencies in the international financial architecture. This meeting will add momentum to calls by countries of the “Global South” for deep financial architecture reforms, which increasingly focus on the role of credit rating agencies. These calls include demands for increased transparency in rating methodologies, establishing public credit rating agencies, accounting for climate risks in assessment methodologies, and more substantive mechanisms of accountability.

Through her work, Professor Klusak aims to change the way financial policy and credit risk modelling reflect the impact of climate stress and to create a sustainable future in finance.