Financial firms are facing climate reality

Global survey shows climate risk management programs being developed, but at an uneven pace

Financial firms are facing climate reality

Recognized by financial-market participants as well as policy-setting bodies, climate change has taken centre stage as an economic and financial risk. That shift in perspective has catalyzed greater awareness in a range of industries — and notably, in the case of financial services, more action.

In a global survey of 27 major financial institutions — including, banks, asset managers, and insurers — which collectively represent around US$20 trillion in assets, the Global Association of Risk Professionals (GARP) found more than 80% of participants have already identified climate-related risks and opportunities. That includes efforts to facilitate a shift toward a low-carbon economy through new offerings like green bonds (60%) and modifications of existing products (40%).

“Financial institutions' treatment of climate risk has changed dramatically over the past five years," said Jo Paisley, Co-President of the GARP Research Institute. “Whereas they used to view climate change largely as a reputational risk, banks and other firms are now treating it as a financial risk and are formally integrating it into their risk management frameworks.”

When asked when their organization was first introduced to climate risk as an issue they must address, around half of the participating firms said it was more than five years ago.

The survey also found that just over half of firms approached climate-risk management as a strategic (focused on long-term financial risks with board engagement) effort, as opposed to just being responsible (focused on reputation) or responsive (focused on narrow, short-term financial risks). When asked what approach they aim to have in the future, more than 95% cited the strategic approach.

But a look at what’s being done shows uneven progress in developing core climate risk management capabilities. While 26% of respondents said they have a dedicated climate-risk function, only certain respondents already have mature climate risk management frameworks. Such frameworks include:

  • Use of metrics, targets, and limits for managing asset/liability risks and organization operations;
  • Scenario analysis for assessing climate-related risks; and
  • Disclosures concerning governance (board oversight, senior management involvement), strategy (how long the firm has been assessing climate risk, time horizons over which risks and opportunities have been identified, etc), and risk management (the process for identifying, assessing, and managing climate-related risks)

“[M]ore than half of the respondents score well on governance, having established board-level oversight for climate risk,” the report said. Most firms have considered their strategy in light of climate change and are disclosing climate-risk information. Most also have metrics, albeit without corresponding targets and limits, and just over half of all firms use scenario analysis to understand how climate risk can affect their business.

“Firms are at different stages of maturity in their approach to climate risk management, and their self-assessments of their current maturity levels are inconsistent,” the report said. “Perhaps those firms that have not really started undertaking this in earnest are not yet aware of what they need to do.”


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