The Covid-19 outbreak brings into sharp relief the need to address sustainability risks and improve societal resilience. Climate change poses a threat to financial stability and the safety and soundness of financial firms. In light of the growing regulatory interest, banks are now encouraged to actively embed climate-related risks in their business operations and risk management frameworks.
Leila Kamdem-Fotso Partner - Financial Services
Financial risks of climate change
Major banks try to mitigate financial risks of climate change – but global response is inconsistent, reveals Mazars’ research.
New report examining climate change policies of 30 major banks shows:
- 73% have exclusion policies to reduce involvement in carbon intensive sectors
- Smaller banks still not disclosing climate change as source of financial risk
- European Commission has stated sustainable finance will drive post Covid-19 economic recovery
12 May 2020: Mazars, the international audit and advisory firm, today shares research on how 30 of the largest banks1 across the world are responding to climate-related financial risks.
Based on publicly available information, the report focuses on the extent to which the largest banks have integrated climate change in the areas of governance, risk management, disclosures and scenario analysis, and their level of readiness for recent and upcoming climate-related supervisory expectations.
The report, ‘How banks are responding to the financial risks of climate change’, follows the publication of the European Commission’s ‘Renewed Sustainable Finance Strategy’, which made clear the pandemic has not postponed European long-term sustainability objectives. The EU’s sustainable finance agenda will, in fact, be a crucial factor in the economic recovery in response to Covid-19 and the financial sector will play a key part in mobilising the necessary capital.
The report finds that 77% of banks analysed have climate-related risks reviewed by the board of directors through their sub-committees; 43% have launched cross-functional working groups on climate change and Task Force on Climate-related Financial Disclosures (TCFD) reporting.
The main organisational models observed in banks to address climate-related risks and opportunities are:
- CSR teams at central level
- Cross-functional teams (sustainability, risk and business lines)
The report finds that nearly all sampled banks recognise the materiality of climate-related risks – both physical and transition.
However, their main focus is currently measuring the impact of transition risks on credit risk. Methodologies to assess physical risks appear to be at an earlier stage, notably due to a lack of both asset-level data on borrowers and spatial analysis skills within banks.
For most banks, the assessment of climate-related financial risks is more qualitative than quantitative, and mainly focuses on the identification of high-risk sectors. 73% of the banks covered have put exclusion policies in place aimed at reducing their involvement in carbon intensive sectors.
A wide consensus exists on the TCFD framework and 43% of banks analysed started to disclose within this framework.
However, climate-related information is not yet disclosed in a comparable manner and cannot always be found in mainstream reports (annual financial filings). Our research revealed a gap between the largest and smaller-sized banks. There is an overall lack of detail and consistency in the information currently disclosed: smaller banks do not disclose climate change as a source of financial risk.
Scenario analysis appears to be the most challenging component of climate-related risk management. More than half of banks declare using scenario analysis but still in ‘pilot’ mode, as they await more mature methodologies and tools to improve their performance.
The report finds that there is a lack of comparable and good quality data at sector and borrower levels and difficulties with the modelling of financial impacts of climate change.
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Mazars is an internationally integrated partnership, specialising in audit, accountancy, advisory, tax and legal services2. Operating in 91 countries and territories around the world, we draw on the expertise of 40,400 professionals – 24,400 in the Mazars integrated partnership and 16,000 via the Mazars North America Alliance - to assist clients of all sizes at every stage in their development.
(1) 25 largest banks based on their size of assets according to the 2018 S&P Global Market Intelligence report and 5 additional UK banks.
(2) Where permitted under applicable country laws.