Climate Risk Stress Testing CRST forms the cornerstone of our holistic approach to climate risk management. It serves as a critical tool for assessing our resilience to market movements by providing a forward-looking analysis of exposure to physical and transition risks. Since 2022, we have been actively developing the CRST framework and methodology. Efforts have been focused on refining and strengthening stress testing capabilities and infrastructure to effectively integrate climate-related risks into existing stress testing frameworks. In preparation for BNM’s 2024 CRST exercise, we conducted a gap assessment to identify areas for improvement and develop additional methodologies required for the exercise, supported by an appointed external consultant. Pilot exercises were conducted, focusing on medium and long-term scenarios involving both transition and physical risks. Physical Risks Transition Risks High Low Low High Orderly Hot house world Disorderly Too little, too late Divergent Net Zero (1.5°C) Delayed 2°C Net Zero 2050 (1.5°C) Below 2°C NDCs Current Policies Scenarios were based on those prescribed by the Network for Greening the Financial System (NGFS) and aligned with the CRMSA guidelines and the CRST Exercise Methodology Paper released in February 2024. The CRST framework is designed to project a 30-year climate-adjusted Expected Credit Loss (ECL) based on three distinct NGFS scenarios: Hot House World, Orderly, and Disorderly. The methodology incorporates climate risk by using climateadjusted Macroeconomic Variables (MEVs) and climate-adjusted Expected Default Frequency (EDF) obtained from third-party proprietary tools to assess the impact of climate-related risks on the ECL for our retail and non-retail portfolios. NGFS Scenario Key Insights from CRST Pilots Hot House World Current Policies Scenario Orderly Net Zero 2050 Scenario Disorderly Delayed Transition Scenario Represents the most adverse physical risks, with significant long-term impacts. Depicts an orderly transition to net zero emissions by 2050, resulting in minimal disruptions. Requires rapid adjustments after 2030, leading to higher costs and increased challenges compared to an orderly transition. Bank Islam Malaysia Berhad ◆ Integrated Annual Report 2024 134 Sustainability Statement
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