Although most global financial institutions have begun the risk assessment process, they are less advanced with execution
Banks, investment managers, and other financial institutions (FIs) worldwide face challenges from climate change, but are they able to meet the task?
An international study of FIs has found that, while most are moving onwards with climate change mitigation strategies, far fewer have begun – or are confident in – the execution.
While around 90% of survey respondents have at least started creating a climate risk framework, less than 20% have fully engaged business lines to perform risk assessments and therefore do not fully understand how climate change may impact them.
Only 8% of participants conduct scenario analysis to assess the impact of climate risks and broader environmental risks and 25% said that they have have no plans to allocate budget towards climate-risk transformation projects and activities.
The research was undertaken in January by management consultancy Sia Partners and law firm Cadwalader, Wickersham & Taft LLP.
"There is considerable work to be completed, and study participants noted that the industry is well past the point of kicking the can down the road,” said Bradley Ziff, an operating principal at Sia Partners who directed the project for the two firms. “Leaders in this space are emerging – namely, the larger banks and investors and those who have been investing for several years by putting in place real climate risk mitigation strategies supported by operational and data efforts to meet both market and regulatory objectives."
Market opportunity
Scott Cammarn, a senior counsel in Cadwalader's Financial Services group, says that FIs should stop thinking about climate change risk assessment as purely a regulatory issue, but also as an opportunity for increasing market presence and as a client service.
"The financial institutions that are most advanced in their thinking about climate risk are applying what they learn in dealing with their internal and proprietary challenges as lessons that can be passed on to clients and potentially as opportunities to increase revenue by helping clients with the management of clients' regulatory, business and stakeholder risks,” he said.
Data matters
Survey respondents repeated previous calls for standardization across global regulators and for greater transparency in ESG disclosures.
They also highlighted how access to quality data is vital.
"The opportunities are not lost on financial institutions," said Brendan Moriarty, a co-author from Sia Partners. "There are serious players with innovative approaches, moving forward with their offensive position, rather than strategizing on how to mitigate physical and transition risks."
The study concludes that firms will have to have both “thoughtful and balanced efforts” to achieve meaningful risk mitigation.
