Menu

Second Annual Global Survey of Climate Risk Management at Financial Firms: Mapping out the Continuing Journey

 
By Jo Paisley, President, and Maxine Nelson, Senior Vice President
 
 
May 14, 2020

Executive Summary

The focus on the potential financial risks from climate change has intensified since the GARP Risk Institute's (GRI) inaugural global, cross-sectoral survey of climate risk management in 2019. Regulators are increasingly looking to understand financial firms' practices in this area, with some setting formal expectations and establishing stress-testing exercises. Simultaneously, investors are looking for improved climate-related disclosures from firms to help them better understand the nature of these risks and price them accordingly.

Against this backdrop, GRI's 2020 survey of climate risk management practices covered a significantly larger sample of firms than in 2019, with 71 (versus 27 in 2019) financial institutions participating: 43 banks and 28 other financial institutions, comprising asset managers, insurers and financial market infrastructure companies. These firms have a global footprint, cutting across all regions. Collectively, they have around $42 trillion of assets on their balance sheets, have assets under management of $36 trillion, annually process more than $1,800 trillion of securities and account for about $3.8 trillion in market capitalization.

As in 2019, the GRI 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 include the governance and strategy to deal with actual and potential climate risk; firms' approach to risk management; metrics, targets and limits used to assess and manage climate risk and opportunities; the use of scenario analysis to understand the risks; and climate risk disclosures.

Climate risk will affect different types of firms in different ways, reflecting the diverse nature of the firms' business models and the geographies in which they operate. 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.

This year, we were able to build a more detailed maturity model for climate risk management, diving into some topics in more depth. Using this maturity model, we scored and rank the participating firms on their current climate risk management capabilities across six dimensions: (1) governance; (2) strategy; (3) risk management; (4) metrics, targets and limits; (5) scenario analysis; and (6) disclosure.

This model provides a useful snapshot of current climate risk management practices across the financial services industry and should help firms prioritize future improvement areas. It also provides a map to those firms that are just starting along the path to identifying and managing climate-related risks to their businesses.


Key Takeaways

Firms noted several barriers and challenges to addressing climate risks. They are consistently most concerned about the availability of reliable models and regulatory uncertainty, especially in the short term. And regardless of the firms' own climate risk maturity, most state that getting internal alignment on climate risk strategy is a challenge in the short term.

The relative importance of physical and transition risks differs across the types of firms. Almost all banks consider that physical and transition risk will have an equal impact on their organization. Asset managers, insurers and other types of firms are more evenly split between whether both transition and physical risks are equally impactful or transition risks (on their own) are more important.

Firms recognize that there are risks and opportunities arising from climate change. Both are expected to rise over time, but climate-related opportunities are expected to have a more significant impact on strategy in the next five years than the risks.

Self-assessment is more consistent. Last year, there was a significant disconnect between firms' perception of their climate risk capabilities and their actual capabilities. This year, as in 2019, just over half of firms said they are currently taking a strategic (comprehensive) approach to climate risk.But a far smaller proportion of the less advanced firms have classed themselves as ‘strategic’ in this year's survey.

Most firms do not have a dedicated team for managing climate risk. The most common approach to staffing is to embed specialist staff within existing risk functions or other teams, rather than create a separate, standalone climate risk team. This is at least partly because the majority of firms view climate risk as a transverse risk that cuts across risk types such as credit, market and operational, as opposed to a principal risk.

Firms are particularly concerned about their long-term resilience. While more than 80% of firms believe their strategy is resilient to climate change over the next five years, only 10% of firms are confident in their resilience beyond 15 years.

Board-level governance exists at 90% of firms, and engagement is increasing. Three-quarters of board members have seen papers or been involved in discussions about climate risk, although some board members who are responsible have not yet seen papers or discussed it. C-suite members are generally responsible for climate risk, with the chief risk officer the individual most commonly named as the senior responsible executive. In the majority of organizations, that responsibility is shared with others.

Climate risk is widely seen as improperly priced. The overwhelming majority of respondents think that climate risk has been either partially priced or totally omitted from the market's pricing of products. Pricing difficulties cited include the complexity of climate-change forecasting and the lack of robust and reliable climate risk data.

Climate risk measurement approaches are immature. Only a handful of firms use scenario analysis regularly, and just under half use it on an ad-hoc basis. But even when firms are doing scenario analysis, it doesn't feed into their day-to-day processes, and only about half of the firms have taken any action as a result of the analysis.


Governance

Effective risk management in any domain begins with engagement at the highest level of an organization – namely, the board and senior management. Assessing how mature an organization is in managing climate risk requires understanding the role the board plays in overseeing climate-related issues, as well as how senior management measures and manage those issues.

To assess a firm's governance of climate risk, participants were asked about the oversight of climate risk by the board. Questions about the climate risk material provided to and reviewed by the board, and the responsibilities of C-Level executives for climate risk management, were included.

As we found in last year's survey, board oversight of climate-related risk exists at most firms, and the majority of boards have indeed seen papers on climate risk.


Figure 1: Board Involvement

a1Z1W000005VBsTUAW

As Figure 1 (above) shows, board engagement has strengthened further this year, with several firms noting a variety of different ways that their board has engaged with climate risk. These include:

  • Holding a board strategy offsite that featured a keynote speaker on climate change.
  • Presenting an updated enterprise risk management (ERM) framework to recognize climate risk as a new cross-cutting risk type.
  • Considering climate risk in their annual Internal Capital Adequacy Assessment Process (ICAAP).
  • Reviewing disclosures related to greenhouse gas (GHG) emissions and climate risk.
  • Discussing the status of the firm's TCFD reporting capability.
  • Approving the firm's approach to financing emissions-intensive sectors.

However, some of the firms that said that their board has oversight of climate risk and opportunities also reported that the board had not actually seen papers about it or even discussed it, indicating a lack of true engagement.

The chief risk officer (CRO) is the individual most commonly named as the senior responsible executive for climate risk management. In the majority of organizations, that responsibility is shared with other C-suite members. The chief executive officer (CEO) is the next most common responsible person, followed by the chief sustainability officer (CSO), chief financial officer (CFO), chief operating officer (COO), and chief investment officer (CIO). Most firms, moreover, have more than one member of senior management responsible for climate risk.

Read More

BylawsCode of ConductPrivacy NoticeTerms of Use © 2021 Global Association of Risk Professionals