Awareness of the dangers of climate change is rising among political and business leaders, according to the World Economic Forum’s recent Global Risk Report 2019, a survey of 1000 experts and decision-makers. Most of them place the failure to mitigate or adapt to climate change, extreme weather events and natural disaster risks above all others (including cybercrime and geopolitical risks) in terms of the combination of their impact and likelihood.
The subject is also becoming a regular talking point at high-profile events, including those hosted by The Banker. This is good news: failure to act against climate change has consequences for society at large and can directly affect businesses and the financial sector supporting them. But details on how banks can measure those risks often remain elusive, which is dangerous. If it is true that ‘what gets measured gets done’, what your risk function cannot quantify, model and analyse may never lead to an appropriate course of action. It may never transform a growing C-suite concern into better business plans.
Yet this is possible. Banks such as Nordea and ING, based in markets that are traditionally more attuned to these issues, are already studying how best to incorporate risks related to climate and the scarcity of natural resources in their client analysis. Pressure from the Task Force on Climate-related Financial Disclosures, set up by the Financial Stability Board, is causing more and more firms, including banks, to look at how environmental concerns and climate change policy may affect their own business. Legislators in France have gone a step further, making such disclosures mandatory, something the EU is also considering.
Even if not legally enforced, leadership pressure may soon push environmental risks up the priority list of bank risk managers, whether with regards to clients or the future of their own institutions. They had better start preparing, and sooner rather than later. After all the surveys and headline talk, now is the time to get to the details.
