COP26 Outcomes #4: Managing climate risk

The risks from climate change to both the economy and associated financial systems could result in material and wide-ranging impacts. Climate change is now widely recognized as a systemic risk to the stability of the financial system.

Financial institutions need to enhance their risk management capabilities and business strategies to capture the physical and transition risks and net-zero commitments. Pressure is building from:

• Governments – policies and net-zero commitments
• Regulators – regulations to ensure the health of the economy
• Investors & customers – demanding climate disclosures and sustainable financing

COP26 will help to highlight the amount of work required to achieve climate commitments as well as increasing the pace of transition across regions. This will increase the financial impacts and transition risks across the finance sector, highlighting the need for embedding climate risk into a firm’s risk framework. Below are Baringa’s 6 recommendations for embedding climate risk:

1. Scope your climate risk management target state tightly
2. Get specific about the opportunities to finance transition
3. When embedding in credit, lead with “Why” and “What”, not “How”
4. Don’t try to embed your net-zero targets through your risk framework
5. Don’t rush to set climate risk appetite
6. Include qualitative content in your climate risk MI

Baringa and BlackRock offer a market-leading Climate Change Scenario Model to help quantify your climate risk exposures – see more here.

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