Second Annual Global Survey of Climate Risk Management at Financial Firms

Mapping out the Continuing Journey, 2020

Estimated reading time: 2 minutes, 50 seconds

GRI recently conducted its second annual global, cross-sectoral survey on climate-related financial risks, and now presents the results in a comprehensive report. Through the lens of governance, strategy, risk management, metrics and scenario analysis, the report examines how firms measure and manage the risks and opportunities associated with climate change.

Board-level governance exists at 90% of firms, and engagement is increasing

Key Takeaways

Firms noted several barriers and challenges to addressing climate risks.  They are consistently most concerned about the availability of reliable models and regulatory uncertainty, especially in the short term. And regardless of the firms’ own climate risk maturity, most state that getting internal alignment on climate risk strategy is a challenge in the short term.

The relative importance of physical and transition risks differs across the types of firms.  Almost all banks consider that physical and transition risk will have an equal impact on their organization. Asset managers, insurers and other types of firms are more evenly split between whether both transition and physical risks are equally impactful or transition risks (on their own) are more important.

Firms recognize that there are risks and opportunities arising from climate change. Both are expected to rise over time, but climate-related opportunities are expected to have a more significant impact on strategy in the next five years than the risks.

Self-assessment is more consistent.  Last year, there was a significant disconnect between firms’ perception of their climate risk capabilities and their actual capabilities.  This year, as in 2019, just over half of firms said they are currently taking a strategic (comprehensive) approach to climate risk.  But a far smaller proportion of the less advanced firms have classed themselves as ‘strategic’ in this year’s survey.

Most firms do not have a dedicated team for managing climate risk.  The most common approach to staffing is to embed specialist staff within existing risk functions or other teams, rather than create a separate, standalone climate risk team.  This is at least partly because the majority of firms view climate risk as a transverse risk that cuts across risk types such as credit, market and operational, as opposed to a principal risk.

Firms are particularly concerned about their long-term resilience.  While more than 80% of firms believe their strategy is resilient to climate change over the next five years, only 10% of firms are confident in their resilience beyond 15 years.

Board-level governance exists at 90% of firms, and engagement is increasing.  Three-quarters of board members have seen papers or been involved in discussions about climate risk, although some board members who are responsible have not yet seen papers or discussed it.  C-suite members are generally responsible for climate risk, with the chief risk officer the individual most commonly named as the senior responsible executive.  In the majority of organizations, that responsibility is shared with others.

Climate risk is widely seen as improperly priced.  The overwhelming majority of respondents think that climate risk has been either partially priced or totally omitted from the market’s pricing of products.  Pricing difficulties cited include the complexity of climate-change forecasting  and the lack of robust and reliable climate risk data.

Climate risk measurement approaches are immature.  Only a handful of firms use scenario analysis regularly, and just under half use it on an ad-hoc basis.  But even when firms are doing scenario analysis, it doesn’t feed into their day-to-day processes, and only about half of the firms have taken any action as a result of the analysis.

(Originally published May 14, 2020)

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