Overview

Rising frequency and severity of natural disasters (for e.g., wildfires in California, Brazil and Australia), extreme weather events (e.g., supply chain disruption in 2018 in Germany following the low water levels in the Rhine river), and policy action to mitigate climate change (e.g., the ban on diesel cars in select major cities) have led to severe climate-related stress in major companies. This report delves into the risks banks face from climate change.

Key Take-aways:

• On the one hand, demand for climate risk management is rising at banks as the effects of climate change become more visible. On the other, the increasing availability of data and tools, well-thought through reporting frameworks, and also literature from recognized industry bodies is leading to a conducive environment for banks to be able to quantify the inherent risks in their portfolios
• Regulatory action is starting to pick up with several major regulators having issued guidelines for banks to incorporate climate risk management practices in their normal course of operations. Furthermore, a few regulators have also issued detailed guidelines on climate risk stress tests, and such an exercise is already underway at least in one country
• Given that climate risk management as a practice is still a very new area, we are seeing major global banks being at varied points on the maturity curve, and needless to say, the curve itself it still evolving. We are already seeing plenty of examples of banks setting the benchmarks for the industry by incorporating innovative practices across the areas of governance, business strategy, risk management, and reporting, to name a few
• However, like any new area, several challenges remain and we expect banks and regulators to remain heavily engaged as they work towards improvements in the components of data, tools and methodologies, taxonomy, risk measurement, scenario development and stress testing, among others