Climate change poses a threat to financial stability and the safety and soundness of global financial firms. In light of the growing regulatory environment, banks are now encouraged to actively embed climate-related risks in their business operations and risk management frameworks. While many are doing just that, recent research by Mazars found that the effort and process remain inconsistent.
The report finds that 77% of banks analyzed have climate-related risks reviewed by the board of directors through their sub-committees; 43% have launched cross-functional working groups on climate change and Task Force on Climate-related Financial Disclosures (TCFD) reporting.
The main organizational models observed in banks to address climate-related risks and opportunities are:
- CSR teams at central level
- Cross-functional teams (sustainability, risk and business lines)
The report finds that nearly all sampled banks recognize the materiality of climate-related risks – both physical and transition. However, their main focus is currently measuring the impact of transition risks on credit risk. Methodologies to assess physical risks appear to be at an earlier stage, notably due to a lack of both asset-level data on borrowers and spatial analysis skills within banks.
For most banks, the assessment of climate-related financial risks is more qualitative than quantitative, and mainly focuses on the identification of high-risk sectors. Research found that 73% of the banks covered have put exclusion policies in place aimed at reducing their involvement in carbon intensive sectors.
A wide consensus exists on the TCFD framework and 43% of banks analyzed started to disclose within this framework.
However, climate-related information is not yet disclosed in a comparable manner and cannot always be found in mainstream reports (annual financial filings). Mazars’ research revealed a gap between the largest and smaller-sized banks. There is an overall lack of detail and consistency in the information currently disclosed: smaller banks do not disclose climate change as a source of financial risk.
Scenario analysis appears to be the most challenging component of climate-related risk management. More than half of banks declare using scenario analysis but still in ‘pilot’ mode, as they await more mature methodologies and tools to improve their performance.
The report finds that there is a lack of comparable and good quality data at sector and borrower levels and difficulties with the modelling of financial impacts of climate change.