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21 December 2018 3 min read

How Financial Services firms can respond to climate change risk

Chris Taylor

Chris Taylor
Director | Financial Services | London

James Belmont

James Belmont
Director | Finance, risk and compliance

Since Oliver published his last blog on climate change nearly 3 months ago, we have started to see a shift in momentum in how the Financial Services industry is lining up to do its part in helping tackle the global issue of climate change. A quick sample of the last few months includes:

  • Significant media coverage of this month’s UN Summit on climate change
  • Announcement at the Summit by a group of five banks signing up to the ‘Katowice commitment’ to measure the climate change impact of their loan books
  • The Bank of England’s publication on the impact of climate change risk on Banking (following on from earlier report on Insurance)
  • Mark Carney’s statement this week that resilience to climate change may form part of bank stress testing as early as next year
  • Status update from the Taskforce on Climate-related Financial Disclosures (TCFD) stating that FS firms were not yet going far enough
  • A range of media stories on the impact of investor groups such as the Institutional Investors Group on Climate Change putting pressure on firms who they see as not going far enough in tackling climate change

It’s clear that this trend will only continue into 2019 and beyond, with significant pressure and focus coming on those firms who are perceived to be lagging behind in their approach. We see three distinct, but linked, areas that financial institutions need to work to address in the years ahead:
 

  1. Address how to price climate change risk into their loan books, insurance and investment portfolios – how do firms make sure that they are investing in the right projects, firms and industries to not only support the climate change agenda, but also provide the necessary diversification and returns to support the commercial success of their business?
  2.  Model the resilience of their balance sheet and business models to climate change – how do firms use scenario modelling and stress testing to demonstrate the resilience of their business to climate change risk and how does this drive changes in the way that they do business?
  3.  Ingrain the management of climate change risk into the business and corporate governance and climate change disclosures – how do they structure their internal governance and corporate strategy to ensure that climate change risk becomes a core part of what they do and how do they demonstrate this in a way that meets the recommendations of the TCFD?

 
The starting point for all of this, and one that we have worked to solve, is how to understand and quantify the impact of the many factors driving climate change risk. Differing scenarios on increasing global temperatures and changes in weather patterns, the impact of changes in energy, transport, agriculture and other sectors that will be strongly impacted, through to the effects of regulation and changing consumer behaviours make this incredibly challenging and require a broad range of perspectives on financial markets, the energy sector, government policy and regulation. .
 
It’s heartening to see that regulators, investors and firms are taking their role in addressing climate change increasingly seriously, but it’s clear that the work has only just started and the time to address it is now.