Financial firms failing to integrate climate change into risk management frameworks

A survey of 70 global financial firms with total assets of nearly $40trn has found that the financial sector is seriously lagging behind in efforts to formally identify and assess climate change-related risks, and failing to integrate the process into their overall group risk management frameworks. The survey was a joint effort carried out by the Institute of International Finance (IIF) and European Banking Federation (EBF) with their members. The Washington-based IIF said the survey was carried out because of the growing focus on sustainable finance, and particularly the need for a robust toolkit for climate risk management and disclosure. The findings on risk management were disappointing. “Over 45% of survey participants stated that their risk management framework includes an explicit process for identifying and assessing climate-related risks and opportunities. However, only 17% of respondents have fully integrated this process into their organisation’s overall risk management framework,” noted the IIF. The accompanying report concluded more streamlined risk measurement and disclosure frameworks, along with increased international collaboration, are badly needed to strengthen the climate-related risk analysis and reporting toolkit. "This report demonstrates the important industry efforts underway to develop methodologies to better understand, measure and disclose financial risks from climate change," said Dr Axel Weber, IIF chairman and chairman of the board at UBS Group. "The IIF will work with and support its members as they continue these efforts and looks forward to increasing engagement with regulatory policymakers as they begin to develop climate risk supervisory frameworks," he added. The absence of standardised accounting systems and lack of data were identified as problems. The IIF said that among firms that are not yet disclosing data on financed emissions, more than half are hesitant to do so because of the lack of standardised accounting frameworks and data challenges. The good news is that some 70% of respondents expressed interest in the creation of a collaborative, open-source framework to enhance these climate finance-tracking and reporting frameworks. "The EBF is committed to support and contribute to the protection of the environment and we will work closely with our members to develop tangible sector-wide initiatives,"said Jean Pierre Mustier, president of the EBF and group CEO at Unicredit. "Banks need to do more than 'business as usual', because now is the time to act and make an impact. We need to reduce our direct environmental impact by further cutting greenhouse gas emissions and moving towards renewable energy sources. We need to work to make an even bigger difference through our indirect emissions, by partnering with customers in the shift to a low-carbon economy. Building a sustainable future is an important challenge that we must all address together," he added. The IIF said the key findings of the survey include: Supply and demand of sustainable instruments is on the rise. More than half of respondents already issue their own sustainable instruments, and 89% of respondents expect demand for sustainable investments to grow in 2020. Better processes are needed for risk management. Most financial firms at least partially follow the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. Some 60% of institutions are already implementing TCFD recommendations to some extent, with another 30% stating they are planning to do so in the future, according to the IIF. However, adoption of TCFD recommendations varies widely across geographies. Only 37% of emerging market respondents reported disclosing information aligned with TCFD recommendations, compared with more than 80% of respondents in developed Europe.

Financial firms failing to integrate climate change into risk management frameworks

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