Financial services firms around the world are making rapid progress in developing their climate risk frameworks and setting their net zero strategies. We’ve already seen enormous progress across the globe. And yet while regulators and financial institutions are making big strides, there is still a long way to go to fully embedding climate risk and net zero throughout the industry.
Now more than ever, we must pivot from commitment to action. We must do so quickly, but also carefully, making some tough choices along the way. We will need to deliver the transition with the right level of focus on investment in sustainable growth, whilst at the same time driving emissions reductions in the real world.
As a global leader on the energy transition, we’ve spent decades navigating this complex world to drive positive impact. Here are the five most important things financial institutions will need to get right to successfully embed climate risk and net zero strategies.
1. Ensure clarity of accountabilities
Just because it's green doesn't mean it isn't risky. In fact, delivering net zero may well mean increasing concentrations in some parts of your business. For this reason, it's really important to be clear about what Risk teams are accountable for versus the role of Sustainability and Finance teams. Ultimately, this will help you provide the clarity needed to deliver on both your climate risk and net zero objectives. Ambiguous ownership can often result in inaction.
2. Have a joined-up approach across climate risk and net zero
Having defined clear, distinct accountability, you'll need to make sure the changes that you make across climate risk and net zero are aligned and connected, within and across functions and plans.
You will be using much of the data, assumptions and analytical building blocks across both climate risk and net zero. This goes beyond your internal view, extending to your major counterparties' transition plans too. You will want to ensure that you have a consistent view of what their transition plans are, and whether those plans are credible and achievable.
3. Scope your climate risk target state tightly
A “plan for a plan” will not survive. If you want to ensure that you can stand behind your climate risk programme scope – and therefore the funding and resourcing – you'll need to make sure you have an integrated and clear articulation of the target state for each risk type, and at each stage of the risk management lifecycle. This clarity, which can be summarised in around 30 capability statements, is key to your ability, both to keep control internally of your programme scope, and also to demonstrate holistic thinking externally to your regulators and auditors.
4. Build a deep understanding of transition across your business
Climate risk and net zero are not just about sophisticated climate analytics – it's also about developing internal understanding. We believe that the firms that will be most successful in navigating the transition are going to be those who invest in training their teams, at scale, in how climate risk and net zero impacts their roles – whether that's helping the mortgage business to understand the decarbonisation of heat in homes, or helping the transport relationship managers to understand transition in the shipping sector
Additionally, it will be the firms that develop their ability to anticipate the political risks associated with transition in their sectors and regions, as the ones who are not only able to manage the risks better, but who also make the most of the opportunities to finance the transition.
5. Build clear incentives for your businesses to deliver on your net zero commitments
To deliver on your net zero commitments, you need to build the processes now that will enable you to incentivise your businesses. There are going to be times over the coming years when the external carbon price – and the real economy's progress towards net zero – don't keep pace with your own commitments.
Imposing carbon limits on your businesses is an inefficient and ultimately an ineffective approach. You will therefore need the ability to transfer the price of the internal cost of carbon through to your business lines.
Financial services firms are under regulatory pressure, as well as commercial pressure to protect themselves from the impact of climate change and align with the global sustainability agenda. Speed of implementation matters. Those firms that are able to understand their climate risks early will be much better placed to manage those risks and to benefit from the opportunities to finance transition.
We have tried-and-tested tools and expertise to support financial services firms’ climate risk and net zero activities:
|We’ve more than 20 years’ experience advising financial services, governments and energy clients on energy transition||Our partnership with BlackRock’s Aladdin Climate offers leading climate risk capabilities and analytics|
|We’ve delivered training on climate change to the boards of 16 financial services clients, including 6,000 people across all levels||We’ve worked with financial services firms to develop Credible Transition Plan Scorecards to accelerate net zero delivery|
|We have helped more than 50 clients to embed climate risk within their organisation|
Our glossary of Climate Change jargon and acronyms will help you navigate and better understand the complex policies, forums and negotiations.
If you'd like to know more about how to get these five things right, please contact James Belmont or Clémence Vandewalle.
Base Case Climate Scenario
Baringa's Base Case Climate Scenario subscription provides a data driven view of the probable regional and country level path of transition to help accurately plan for the future.Read more
What can banks learn from the 2022 climate disclosures?
As the 2022 climate reporting cycle gets underway for the UK banks, Baringa has performed a benchmarking exercise and extracted the key themes and insights that are appearing.Read more
Mid-tiers’ slow and steady ESG strategy - report
Our benchmarking study is designed to show mid-tier banks are progressing on their sustainability agendas and what they can do to speed up.Read more
Embedding climate risk and net zero concepts
In this video, we find out which areas you should focus on as you work to embed climate risk and net zero within your organization.Read more