Bloomberg survey finds most firms in the industry have started assessing climate risk, but most are at an early stage
The risk to financial firms from climate change is considered a top priority, but a new survey finds there is some way to go to address it.
Bloomberg’s poll of 100 executives from financial services firms globally reveals that, while 85% of them have begun to assess the impact of climate risk, there is no consensus on how it should be embedded into risk management frameworks.
Conducted in May, the research shows that, of these firms, 37% are in the early stages of planning how to incorporate climate risk into models and governance, and 43% are in the mid-stage of incorporating climate into risk management and governance analysis based on measures like carbon emissions.
Just 5% of respondents indicated that there are in an advanced stage, including having comprehensive data and multi-scenario analysis based on a variety of climate variables like carbon emissions, geolocation data, and extreme weather events.
Regulatory pressures
Most of the executives said that their focus on climate risk is about more than just regulatory requirements.
However, one fifth of respondents admitted that regulators were the audience they were addressing their climate risk analysis at.
A greater share (27%) is focusing on senior management as their top audience (27%); followed by investors (20%), portfolio managers (18%), and traders (13%).
Similarly, the main driver of climate risk considerations within the investment process is regulation and disclosures requirements (25%) followed by risk management (18%), performance (15%), reputational risk (14%), sensitivity and stress testing (12%), and client pressure (9%).
What data?
Respondents were not united on what they want their climate risk analysis to show:
- climate value at risk (22%)
- valuation impact at different timelines (20%)
- climate adjusted default probability (15%)
- climate risk scores (15%)
- don’t know (16%)
Climate risk is known to have a significant impact on firm’s credit risk profile but just 6% of respondents said it was a priority to implement climate risk outright is their top priority.
The top priorities for credit risk management were:
- generating early warning signals (30%)
- identifying credit risk developments as they may affect counterparties (28%)
- scenario analysis and stress tests (18%)
- firm alignment on managing credit risks (17%)
"Most firms are at the early stages of implementing their climate risk frameworks, and even those who say they have a robust model will be making significant changes over the next few years as our understanding and consensus around climate risk grows,” said Zane Van Dusen, head of risk & investment analytics products at Bloomberg. “More and better data will go a long way toward improving firms' ability to manage climate risk."
