What a time to be a risk manager: Navigating climate change risk - by Elisabeth A. Wilson

what a time to be a risk manager: navigating climate change risk

by Elisabeth A. Wilson

With the Intergovernmental Panel on Climate Change (IPCC) issuing increasingly dire warnings about humanity’s ability to thwart the most serious implications of climate change, and with more extreme weather patterns and events exacting catastrophic tolls on life and property, it is clearer than ever that we stand at a stark tipping point.1 Climate change and its sister subject Environmental, Social and Governance (ESG) are considered by many to be emerging risks. These might not be new topics, but they have seen a rapid rise in prominence since 2020 thanks to the COVID-19 Pandemic, which has demonstrated in real time the potential economic and existential consequences of a low likelihood/high severity event. The current pandemic seemed unimaginable to a society resting on its scientific and technological hubris. However, the increased 100-year hurricanes and floods, wildfires and mudslides and unprecedented heatwaves and rains we have witnessed in the last two years are more unnerving harbingers. The resultant shocks to our economies, fundamental infrastructures, and supply chains are only the beginning.

What a time to be a risk manager. The possible negative outcomes of climate change—environmental, geopolitical, economic, social—seem endless, difficult to predict and even harder to quantify. Couple this with a lack of historical context to forecast future climate change-driven events and ramifications and you have the modern equivalent of the Gordian Knot, one that is even more challenging due to burgeoning regulations and limited global cohesion on how to tackle the necessary transition to a netzero economy. Increasingly, it looks like this transition will be a disorderly one, with various countries, regions and sectors taking maverick approaches regarding climate change-related regulations, laws, targets and methodologies.2

Luckily, risk managers do not have to go it alone. Current regulatory and risk approaches are still haphazard, but there are areas of solidarity. Thanks to the International Standards Stability Board (ISSB), there is the promise of future global consistency regarding climate change-related financial disclosures.3 The Financial Stability Board’s Task Force of Climate-Related Disclosures (TCFD) has been so widely adopted across the financial industry that it is being touted, not only by ISSB, but by other regulators such as the Security Exchange Commission (SEC) as the basis for future formalized regulatory guidance.4 The Network for Greening the Financial System (NGFS) also offers periodically-refined scenarios to support an initial scenario analysis, central to engaging business leadership in wrapping their minds around potential financial and economic climate exposures—and solutions. Subsequently, key facets of TCFD, NGFS and other standards like the Global Reporting Initiative (GRI) can become the foundation of a risk manager’s climate change arsenal.

Broaching the concept of climate change-related risk can feel like waging a battle. Risk managers are not always greeted with open arms on the best of days, and now they need to be prepared to go into conversations with leadership supported by limited climate change data, a dearth of historical context, vague concepts regarding potentially myriad outcomes and far-reaching, difficult-to-fathom timeframes. This is where a strong, persuasive argument around the long-term view of climate change is essential. Risk managers do not need to rely on science-backed arguments or moral proselytizing to engage leadership in identifying potential exposures. The argument is far more fundamental, compelling and age-old: follow the money.

From what we have seen of realized climate change events so far, future financial implications likely will be profound. A risk manager’s argument should focus on possible loss, certainly, but also on the potential for gain. There is a more proactive view of climate change, one where investments in green technologies may result in trailblazing societal advances and financial windfalls. With the world’s dependence on oil and gas requiring reliance on increasingly hostile and volatile countries, easing away from these carbonintensive supplies to greener solutions may not only curb greenhouse gas emissions but might pose greater geopolitical balance and economic boons.

Risk managers stand on the line, guarding their organizations against an enemy whose realization will be unpredictable and will come from all sides. However, risk managers at financial institutions hold an uncanny upper hand in the struggle to reduce greenhouse gas emissions and to promote a low carbon economy. It is risk managers who will harness TCFD and NGFS to refine risk management infrastructures, who will provide feedback to help shape future regulations, who will lead identification of essential climate change abatement strategies through more sound financing and investment.

Financial institutions are the backbone of the global economy, and risk managers will help drive green finance and hedge climate risk exposures one conversation with leadership, and one scenario at a time. What a time to be a risk manager.

1. Harvey, Fiona. “IPCC issues ‘bleakest warning yet’ on impacts of climate breakdown.” The Guardian,

February 28. 2022, https://www.theguardian.com/environment/2022/feb/28/ipcc-issues-bleakestwarning-yet-impacts-climate-breakdown?CMP=oth_b-aplnews_d-1. 2. Mulder, Gerhard and McCarthy, Oscar D. “A Random Walk into Climate Disaster.” PRMIA Institute,

October 2021.

3. “IFRS Foundation announces International Sustainability Standards Board.” Value Reporting

Foundation, November 3, 2021, https://www.valuereportingfoundation.org/news/ifrs-foundationannouncement/?utm_source=eloqua&utm_medium=email&utm_campaign=newsbytes&utm_ content=NEWSBYTES-20211104 Accessed February 28, 2022. Press Release. 4. Lee, Allison Herren. “Regulation S-K and ESG Disclosures: An Unsustainable Silence.” U.S. Securities and Exchange Commission, 26 Aug 2020. Public Statement.

notes

Disclaimer: All views expressed in this article are my own and do not represent the opinions of any entity that I may be associated with.

author

Elisabeth A. Wilson

Elisabeth A. Wilson has worked for over 14 years in the financial industry. She was recruited to Atlantic Union Bank’s Enterprise Risk Management Department in 2016 to support development of the company’s then-burgeoning risk management framework. Recently charged with crafting the Bank’s Environmental, Social and Governance (ESG) Risk Framework, Elisabeth continues to build, implement, and manage key risk programs, driving regulatory alignment and promoting bank-wide engagement while simultaneously supporting business line risk oversight. She has also contributed to the ABA Banking Journal, The RMA Journal, and Risk Management Magazine. Elisabeth is based in Richmond, Virginia.