Survey: More and more financial institutions are using scenario analysis to manage climate risk | Item

Conducted by the GARP Risk Institute (GRI), the “Third Annual Global Survey on Climate Risk Management in Financial Firms” collected responses from 78 financial institutions around the world, including banks, asset managers, insurers and other companies, which collectively hold approximately $ 46 trillion in assets on their balance sheets and total assets under management of approximately $ 50 trillion.

“Over the past few years, as we examine climate risk management and the strategies developed by financial institutions, we see companies evolving their capabilities significantly,” said Jo Paisley, President of GRI.

The survey found that scenario analysis has become more common among financial institutions in developing climate change strategies, with 70% of companies saying they regularly use it in their risk assessments. “Climate risk management and scenario analysis are evolving at a rapid pace, and GARP’s annual survey sheds light on the response of companies,” said Adityadeb Mukherjee, Head of Climate Risk Management at Standard Chartered Bank .

An integral part of this, regulatory activity on climate risk is intensifying, as indicated by 80% of companies who said that regulators have published formal expectations for climate risk management. Additionally, 65% said regulators are now asking them to report climate-related risks.

In an Oct. 7 speech at the Federal Reserve’s Stress Testing Research Conference, Fed Governor Lael Brainard said that financial institutions would be wise to conduct climate scenario analyzes that “model possible financial risks associated with climate change and assess the resilience of individual financial institutions. and the financial system to these risks.

In the GARP survey, companies were also asked about the use of indicators (measures used to assess climate-related risks), goals (the result the organization aims to achieve) and limits (the worst outcome that the organization is willing to accept without taking corrective action). action) as part of their climate risk management processes. Collectively, these help companies understand these risks and incorporate them into their risk appetite statements, the GRI said.

According to the GRI, about three-quarters of companies surveyed use metrics, while about half use targets. Only a quarter uses limits. Another quarter said they did not measure their climate risk at all, while a similar percentage used all three measures, targets and limits.

Governance structures

From a governance perspective, 91% of companies said they have increased their dedicated climate risk workforce over the past two years, but the way they structure their workforce varies widely. According to the survey, 42% of companies have created a team dedicated to climate risks. While these teams are most often set up as an independent function, sometimes they are integrated with another established risk management team (e.g. risk management, frontline staff, ESG or corporate responsibility) . Additionally, the survey found that practices vary by type of financial institution, with a dedicated climate risk team more common among banks and insurers than asset managers.

More than 90% of climate risk teams are led by senior managers (those with more than 10 years of experience), according to the survey. Sixty percent said these people sit at head office, and more than half of those surveyed said the person leading the climate risk effort reports directly to a member of senior management, most often the director. risk or the CEO.

At the board level, 92 percent of those surveyed said their board oversees climate risk management, and more than 90 percent said senior managers are responsible for climate risk assessments and management efforts. .

Obstacles and challenges

The most pressing concerns for businesses are the availability of reliable models, followed by regulatory uncertainty, according to the GRI.

Similarly, the survey found that only 6% of companies believe that climate risk is properly assessed, with most indicating that it was not included in the pricing of market products or that it was not included in the pricing of market products. was only partially included.

“Few companies believe that climate risk is properly assessed, there is clearly an opportunity for significant changes in assessments and the associated impacts on financial performance,” said Paisley.

Companies that felt that climate risk is reflected (at least partially) in prices highlighted a few areas, including emerging market sovereign bonds, green bond prices and some lines of insurance, according to the survey. “Companies continue to struggle to find hard, reliable data on climate risk that will allow them to assess risk,” said GRI.

The survey also found that while companies are confident in the resilience of their short-term climate risk management strategies, they are less confident in the long term. According to the results, 77% of companies believe their strategy is resilient over the next five years, but that confidence drops to 22% when you consider the resilience of their strategy over 15 years and beyond.


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Marianne R. Winn

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