why financial institutions need to ramp up their climate risk response
by Damian Hoskins Climate change risk is growing - and financial institutions are beginning to recognize the need to take swifter action. Some 83% of firms highlight climate risk as a major topic, with more than half (60%) putting in place plans to prepare for the impacts of climate change, according to independent research commissioned by Acin. Global financial regulators have also been intensifying their scrutiny of climate-related risk management. Last year, the European Central Bank (ECB) asked the region’s banks to conduct self-assessments based on its supervisory expectations, and to draw up action plans to meet them. The U.S. Securities and Exchange Commission (SEC) in October 2021 signaled its intention to finalize climate change regulations this year. Meantime, the Bank of England’s Prudential Regulation Authority (PRA) also called on institutions to embed climate change-related financial risks into existing governance and risk management frameworks. All of this heightened regulatory attention dovetailed with COP26 last November, which underscored that global financial services companies will be under just as much scrutiny as high carbon-emitting industries such as fossil fuels, mining and aviation. The wider public focus on climate change also means financial institutions will face scrutiny not just from regulators but also investors, customers and their own employees - who are all demanding that firms do more to tackle climate risk.
more work to do Yet despite this growing awareness, financial institutions still have much more work to do, with this year set to catapult climate risk even further up the risk management agenda. For example, in January the PRA issued a Dear CEO Letter outlining its 2022 priorities, one of which was financial risks arising from climate change. While some firms have made good progress, the letter said, action has not been consistent across all firms. It observed that most firms are more focused on the business opportunities presented by climate change, such as publishing glossy reports trumpeting their ESG credentials. Instead, financial institutions need to recognize that climate change is a business risk that is rapidly closing in and requires urgent action now. The PRA says it expects firms to take a forward-looking, strategic, and ambitious approach to managing climate-related financial risks.
Intelligent Risk - April 2022
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