Third Annual Global Survey of Climate Risk Management at Financial Firms

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GARP Risk Institute recently completed its third annual Global Survey of Climate Risk Management at Financial Firms. The results detailed in this independent, comprehensive report are an eye-opening look at how financial institutions seek to measure and manage both the financial risks and opportunities associated with climate change through the lens of governance, strategy, risk management, metrics, scenario analysis and disclosures.

Key Takeaways

Use of scenario analysis is increasing and becoming more mainstream. Around 70 percent of firms are using it, with a rising number employing scenarios as a regular part of risk assessment, and with more firms using their main stress testing infrastructure/ technology. Over half of the firms using scenario analysis have evaluated and taken action.

But there remains a large divergence between the most and least advanced firms. A quarter of firms are not measuring their climate risk at all, while a similar percentage are using all of metrics, targets and limits.

There has been a shift towards greater use of quantitative analysis to assess the climate risk of counterparties. Fewer firms this year are using purely qualitative assessment techniques.

More firms (91%, up from 84% last year) have identified climate-related opportunities. Firms are expecting greater impacts on their strategies from both climate-related risk and opportunities than in last year’s survey, with a particularly pronounced increase in impacts expected in the short term. There is an enormous amount of product innovation, and fewer firms regard a lack of demand for products as a major challenge.

Transition risk is a higher priority at more firms than physical risk or portfolio alignment. Boards at more than half of the firms have seen papers about it.

There has been an intensification of supervisory activity on climate risk. Nearly 80 percent of the firms report that their regulators have published formal expectations for climate risk management, and over 50% have announced climate risk stress tests. Many regulators are also focused on other environmental risks, such as biodiversity loss or pollution.

Firms continue to note many barriers and challenges – the availability of reliable models is the most pressing concern for the greatest number of firms, followed by regulatory uncertainty. Without good-quality models, it is not surprising that nearly all firms (94%) continue to believe that climate risks haven’t been fully incorporated into market prices.

Firms are very confident in the resilience of their climate risk strategies in the short term, but not over the long term. 77% of firms think that their strategy is resilient over the next 1 to 5 years, but that confidence weakens (dropping to 22%) as we look toward 15 years and beyond. Long-term optimism, however, actually increased from last year’s survey.

Climate risk staffing levels have increased at 91% of the firms over the past two years, and nearly 90% of firms expect levels to rise in the next two years. Head of climate risk teams report directly to a C-suite member at more than half the firms, indicating high organizational focus on this risk.

About the authors

Jo Paisley, President of the GARP Risk Institute (GRI), has worked on a variety of risk areas at GRI, including stress testing, operational resilience, model risk management and climate risk. Her career prior to joining GARP spanned public and private sectors, including working as the Director of the Supervisory Risk Specialist Division within the Prudential Regulation Authority and as Global Head of Stress Testing at HSBC.

Maxine Nelson, Senior Vice President, GARP Risk Institute (GRI), is a leader in risk, capital and regulation. In her career, she has held several senior roles where she was responsible for global capital planning and risk modeling at banks, including Head of Capital Planning at HSBC. She also previously worked at the U.K. Financial Services Authority, where she was responsible for counterparty credit risk during the last financial crisis.