White Paper
Climate Risk Management at Financial Firms: Challenges and Opportunities
May 29, 2019
The treatment of climate risk at financial institutions has changed significantly over the past five years. Whereas it used to be viewed mostly as a reputational risk that could be addressed through the environmental, social and governance (ESG) agenda, climate change is now seen by many firms as a financial risk that needs to be integrated into existing risk management frameworks.
This shift can be at least partially attributed to increasing regulatory attention. But even without this focus, it makes sense for risk managers to consider climate-related risks and opportunities. Research by Mercer and 427, for example, indicates that financial institutions will be among the industries most impacted by climate change. Firms will need to adapt their business strategies in response.
Climate risk will affect different types of firms — e.g., insurers, banks and asset managers — in different ways, reflecting the diverse nature of their business models. As climate risk manifests itself through existing risk types (like credit risk and operational risk), practitioners need to consider how climate-driven financial risks can be embedded into current financial risk management frameworks.
The GARP Risk Institute recently undertook a global, cross-sectoral survey of firms' approaches to managing the financial risks associated with climate change. That survey indicated that climate risk management is generally in its infancy, but that firms want to learn and improve their practices. This paper provides a guide to the risk implications of climate change, starting with a brief overview of the current scientific and regulatory context, and then examining the financial risks for different types of financial institutions. It concludes with some practical next steps.
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