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Climate Risk Management at Financial Firms: A Good Start, But More Work to Do

Results from a Global Survey

 

By Jo Paisley, Co-President, and Maxine Nelson, Senior Vice President 

Executive Summary

Potential financial risks arising from climate change are an increasing area of focus, particularly for investors and regulators. To provide a benchmark for how mature firms are in their approach to climate risk management, in the first quarter of 2019, we undertook a global, cross-sectoral survey.

Our sample covered 20 banks and seven other financial institutions (comprising asset managers, insurers and financial market infrastructure companies) from across the globe. These firms have a global footprint, cutting across all regions. They collectively have about $20 trillion (USD) of assets on their balance sheets, manage assets of $12 trillion, annually process more than $1,500 trillion of securities and account for more than $1,300 billion in market capitalization.

The survey was structured around the main themes for climate risk reporting that have been developed through the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures. The topics covered included the governance and strategy to deal with actual and potential climate-related risks; the approach to risk management of these risks; metrics, targets and limits used to assess and manage climate-related risks and opportunities; the use of scenario analysis to understand the risks; and disclosures of climate-related risks.

Climate risk will affect different types of firms in different ways, reflecting the diverse nature of the firms’ business models. The range of practices reported cover the spectrum from firms that are at the forefront of climate risk assessment to those that are just starting on the journey. We developed a maturity model for climate risk management that shows this range at an individual firm level.


Key Takeaways

Board-level governance is practiced at the majority of firms. Most firms (roughly 80%) have board oversight of climate-related risks and opportunities. Two-thirds of board members have seen papers on climate risk, which was introduced as a topic more than five years ago at roughly half of the firms. Senior managers (including C-suite level executives) are typically responsible for managing climate risk.

Though climate risk management is still in its infancy, firms are mostly taking a comprehensive approach. A majority of firms (55%) said they are taking a strategic (comprehensive) approach to climate risk – complete with board oversight and a long-term view of financial risks. Moreover, 95% of firms aim to have a strategic approach in the future. Only a few firms view climate change as a financial risk through a short-term lens, while just a handful describe their climate-risk approach as being driven mainly by reputational risk/ corporate social responsibility (CSR).

Self-assessment is inconsistent. There is a disconnect between how firms perceive their climate risk management approach and what they actually do. Half of the firms with little or no governance describe themselves as taking a strategic approach to climate risk, while a few of the firms with strong governance describe their approaches as either CSR or financial risk driven.

Current business strategies are not resilient enough to protect against future change, but climate risk does present opportunities. Only a handful of firms (15%) believe their current strategy is resilient to further climate change. However, 80% of firms have identified climate-related risks and opportunities. Moreover, 60% have introduced new products in response to climate-related risks and 40% have changed existing products.

Scenario analysis is the least developed aspect of climate risk management. Whereas around two-thirds of firms use metrics and targets, only 50% of firms currently use scenario analysis for climate risk management. Moreover, it is used mainly on an ad hoc basis (rather than for regular risk assessment), and only a few firms that regularly use scenario analysis actually leverage it to take actions.


Governance

Participants were asked about the governance of climate-related risk within their organizations. How many firms have board oversight of climate-related risk (with board members who have seen papers on this topic), and is senior management responsible for climate-related risks?

Board oversight of climate-related risk exists at most of the firms in our survey, and the majority of boards have indeed seen papers on climate risk. Moreover, most firms have more than one member of senior management responsible for climate risk, often at the C-suite level. However, a few firms said that while their board has oversight of climate-related risks and opportunities, they have not seen papers about it or discussed it.


Figure 1: Board Involvement

Figure1

To understand how long climate-related risk has been managed, we also asked respondents when this risk was introduced at their firms. Around half of the firms reported that this was more than five years ago.


Figure 2: Time Period for Introduction of Climate Risk

Figure2

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NEXT:

Climate Risk Management at Financial Firms: Challenges and Opportunities
By Jo Paisley and Maxine Nelson

 
 
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