How the financial industry can enhance and expand climate risk management
Managing climate risk is among the top priorities for companies today, and the financial industry plays a vital role in improving and expanding climate risk management.
As part of our U.S. Risk and Reg Week event this year, Bloomberg’s Head of Risk and Investment Analytics Products, Zane Van Dusen, sat down with Nancy Foster, President and CEO, Risk Management Association, and Mary Obasi, Global Climate Risk Executive, Bank of America, to discuss making climate risk mainstream.
(20:26) Learn how firms can promote and integrate climate risk into the front office and other lines of defense, whether in the early stages of the climate risk journey or building into an established climate risk program.
Making climate risk mainstream
The financial industry is working to create common language and categories for climate risk management.
Traditional frameworks can be used as a starting point, although there’s no universal metric that accounts for all physical and transition risks. Learn what the industry is doing and how financial firms can begin their journey.
Climate risk vs. traditional risk
Several best practices from traditional risk management can be applied to climate risk management. “Using a traditional framework is a great place to start,” Foster said. “With any new risk or driver of risk, which is the case of climate, we start with a framework – which simply put, means helping an organization to identify, measure, manage and ultimately mitigate the risk.”
Obasi highlighted two areas of focus when considering climate risk: data and historical lessons. The former requires a high “level of granularity of the data that you need to be able to really measure and monitor this risk,” Obasi said. As an example, Obasi noted a coastal property, where a risk assessment would start by examining the sea-level rise and flooding possibilities. Further investigation might focus on the property’s construction and whether it is near dams or levees.
The industry’s quick wins
An early success in climate risk management was the formation of RMA’s Climate Risk Consortium, a collection of over 30 banks that Foster said will “work in a collaborative fashion and really start to create that taxonomy, that common language that will really propel us forward.”
Another victory Foster cited was the creation of categories to associate the transition risks of moving to a low-carbon economy and the physical risks of climate change. Having these categories allows for the identification process to begin, quickly followed by a move to measurement. Obasi also praised the consortium for “bringing together leaders from across our industry to talk about the risks that they see from a client perspective and how they’re starting to manage it – what tools, what collateral they might need to manage it.”
Obasi noted that the RMA initiative has been joined by other efforts, such as the Glasgow Financial Alliance for Net Zero, the Sustainable Markets Initiative and the Partnership for Carbon Accounting Financials. Meanwhile, Foster said that smaller financial institutions are also getting involved, with regional banks requesting their own consortium in response to RMA’s.
No one-size-fits-all metric
“There’s always this desire for one metric that gives you a sense of the risk,” Obasi explained, but that single metric doesn’t exist. Rather, the best approach is to look at “a suite of metrics” covering physical and transition risks. “We think about it across all of our seven traditional risk types – everything from our financial risk types, which is the standard ones around credit, market, liquidity risk – but also nonfinancial risk types, which can be things like operational risk or compliance risk,” Obasi said.
How should financial firms begin their journey? “I think starting this process early on and understanding what banks can and can’t do is really important, as well as understanding what are the desired outcomes from the regulators. Having a dialogue is essential,” Foster added.
Climate risk management doesn’t necessarily require development of a new framework. “Take a look at how climate is driving risk within the framework that you have today,” Foster said. “That will help you with the governance process.”
How we can help
Today, effective and efficient ESG risk management and reporting practices can already be enabled through advanced tools that can ingest sustainability data from multiple sources, integrate it with a firm’s own ESG scores and other proprietary data, and perform advanced analytics to facilitate decision-making. To learn more about Bloomberg’s Sustainable Finance Solutions, please click here.