To meet the climate and sustainability commitments that banks have set for themselves, firms must build lasting climate capability across their operations and management needs to make this one of their top priorities.
Banks need to stay the course to meet their climate goals
The financial sector has a pivotal role to help the real economy address the climate crisis, and to enable the transition to a low carbon world. Indeed, one of the aims of the Paris Agreement (COP21) is to make financial flows consistent with pathways towards low greenhouse gas emissions and climate resilience. Governments and regulators are explicit about the stance finance needs to take on climate, and banks have reacted positively, complying with the recommendations of the Taskforce for Climate-related Financial Disclosures (TCFD), embedding climate into risk management practices, for example complying with the Bank of England’s SS3/19 guidance, and committing their financing operation to be net zero by 2050.
The recent COP27 has highlighted the limited progress that has been made for making the required cuts in climate-warming emissions.
Within a decade, there is a risk that we will be looking to set new net zero targets, having overshot the initial 1.5°C objective.
The global climate finance landscape and the role of finance to accelerate the transition was a key topic at COP27. Finance needs to adapt to evolving scientific realities and providing the funding required to develop climate enabling projects. Banks stand on the strength of their balance sheets and capitalisation, but they will need to rely on talent and build lasting climate and sustainability capabilities to achieve their strategic climate ambitions. Many banks have done some tactical training as part of their progress to embed climate risk and focus on net zero commitments, for example, to senior management and key staff. However, banks must now focus on building the right operational capabilities across the organisation end-to-end to provide the required funding, adequately manage climate risks, while focusing on climate-related opportunities.
Upskill people across the organisation
Embedding climate risk, while focusing on net zero targets, requires strategic vision and operational capability. Delivering such transformation and building lasting capabilities requires a cultural shift and step change where teams acquire new knowledge and skills to embed climate considerations into risk management, and to engage clients on their transition plans. However, these cannot be “pockets of excellence” – this is important for all staff across all roles, and having a successful programme can enhance brand and improve employee engagement and retention.
Banks must strategically map out the capability needed, at a scale that matches the momentous challenges that lie ahead. Building robust climate capabilities requires a carefully crafted journey that embeds climate capability into teams, processes, and systems across the whole organisation. Such foundational and cultural transformation can only be successful if prioritised by senior management.
By assessing current capability against a target operational model, banks can identify gaps and the expertise required at a granular level. This analysis will help define role-specific learning pathways that will deliver different levels of proficiency, covering a wide range of subjects from net zero and climate risk to sustainable finance. The learning pathways must be tailored to build capability in an impactful, valuable and inspiring way. This means leveraging a rich set of educational media: training modules, mentoring and workshops, and practical tools and frameworks.
To illustrate what we mean by tailored learning paths, we look at three key groups: executives and board members, front-line staff, and risk management teams.
Train executives and board members
Driving lasting change must come from the top of the organisation, which has been reflected by regulators and standard setters in their guidance. Board-level and senior executive training is a core recommendation from TCFD, and included in most supervisory climate guidance. For example, the US Securities and Exchange Commission’s (SEC’s) proposal for climate-related disclosures requires companies to describe their board’s expertise. However, ensuring the board is fluent in the language and challenges of climate change is not just a regulatory requirement, it’s the crucial step to set the firm’s climate ambitions up for success.
Board-level training should include tailored case studies and insights that take into consideration the bank’s specific balance sheet, business profile, client base, regional policy landscape, consumer behaviour and an understanding of what good leadership in climate looks like. Insights from external speakers – such as senior leaders from other financial institutions or climate experts – can be a good way to enhance the learning experience and increase impact.
Leaders need to be aligned on climate risk and net zero. Beyond a thorough handle of the fundamentals, they need to understand how climate will impact the organisation, including the risks and opportunities for the business. The board needs to establish appropriate governance that matches the organisational structure of the firm, and to define the type of management information needed to reach strategic goals while meeting climate commitments. Importantly, the board should ensure that climate considerations are applied consistently; from risk, to finance, to relationship management, to product origination and marketing.
Empower the front office with climate knowledge, skills, and tools
With the majority of a bank’s exposure to climate risk and its attributed emission coming indirectly from loans and investments, frontline bankers have a unique and important role in helping firms deliver on their climate strategies. Frontline teams need to engage in well-informed conversations with clients about the challenges arising from climate change, and explore the commercial opportunities that mitigate risk and allow the company to thrive in a transitioning economy.
Client facing teams require enhanced expertise about their clients’ industry through sector-specific learning pathways and on-the-job support, especially for bankers working with high-emitting industries. Training needs to be designed by sector experts who understand the impact of climate change on industry, and can provide ongoing support and insights. This should be delivered as context-specific activities that put climate frameworks and tools into practice. For example, via workshops ranging from assessing the credibility of corporate transition plans, to developing commercial pitches. On-the-job coaching offers on-going support to the frontline as they engage in new types of business conversations with their clients.
As well as engaging with clients to gauge risks and opportunities, the enhanced capability of the frontline teams will inform other functions of the bank. For example, how the firm collects climate data to feed its management framework, what sustainable finance products exist and why they are important, and how to identify and mitigate risks such as greenwashing. There is a need to focus on the tools and principles to effectively access transition plans and the credibility of net zero goals.
Enable risk teams to include climate consideration into risk management and modelling
Including climate into the risk management practices needs to balance out three evolving aspects of climate risk management:
- How climate will be integrated into the enterprise risk management (ERM) framework in a firm-specific way
- How the sophistication of climate modelling will evolve to increasingly ambitious supervisory expectations, and
- As climate cuts across all risk types, all teams need to be trained to identify, assess, manage and monitor climate risk within their management practice
Risk professionals are generally positively engaged with the challenges of climate risk management. Even though the management processes are still being adapted to include climate risk, teams are embracing the upskilling effort while new processes, systems and models are being established to manage climate risk. The key is not letting the perfect be the enemy of the good. Climate presents an urgent threat and risk teams need to put their shoulder to the wheel to help the right management solution emerge.
Building lasting risk capabilities requires wide-ranging knowledge, including climate tools and frameworks, climate risk data and methodologies, scenario analysis and modelling approaches, sector insights, decarbonisation pathways, climate regulation and disclosures. As with the frontline, we recommend a training programme that combines different media, including on-the-job training, online modules, and hands-on tools and frameworks.
Embedding lasting capabilities is essential to adapting to an ever-changing climate landscape
Undoubtedly banks must establish robust climate capabilities across the organisation to meet ambitious climate commitments. By carefully designing and deploying educational programmes at scale, banks will foster the cultural shift needed to address the challenge head-on and lay the foundation for long-term success, including attracting the best talent, steering the firm’s portfolio and business model to 2050 and beyond, and being a beacon for clients looking for a partner that understands the climate crisis and can support them through the transition.
Baringa works with the largest financial institutions to build their climate capabilities. We’ve designed and delivered learning pathways to more than 20,000 professionals in the front office, risk functions and wider organisation. With our deep understanding of the success factors and barriers for upskilling and embedding climate across businesses and control functions, we’ve developed a comprehensive capability building framework with a large library of training modules for climate risk, net zero and ESG.
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