Banks making headway on ESG and climate risk policies

11/03/2022 While gaps in data remain a challenge for fully assessing and quantifying climate change risk, 65% of banks now use climate scenario analysis for their risk management framework, according to Mazars Responsible Banking Benchmark Study 2021.

This compares with 38% in the previous benchmark study, suggesting that banks are making headway in road to implementing effective risk management frameworks to strengthen their overall climate risk management strategy.

Bridging risk policy gaps

The majority of banks reviewed in the latest benchmark study use a variety of approaches to assess their exposure to climate change risk. Most have implemented dedicated identification and assessment processes based on tools such as physical or transition risks heatmaps and internal climate risk taxonomies. 

Compared to last year’s benchmark study, 68% of banks reviewed use scenario analysis for climate risk management, up from 38%. And while gaps in data remain a challenge, 62% of banks have adopted solutions to address data gaps compared to only 30% last year. However, in terms of disclosure on the materiality of climate risk, only 19% of banks disclose using credit or market risk metrics.

Working with third-party providers to develop scenario analysis capabilities that translate into key performance drivers alongside modelling major climate-related events can be used to improve materiality and address data gaps. Participating in international initiatives or pilot programmes organised by central banks can also help road test new ideas. As an additional measure, banks engage with their clients and counterparties to either understand or help with their planned transition to address the changes required by climate challenges.

To further embed climate change into their risk management framework, banks need to continue developing and strengthening their risk assessment methodologies and quantification tools and start disclosing climate risk-adjusted credit and market risk metrics.  

1. The Mazars benchmark assesses the sustainability practices of a sample of 37 banks. We have focused our analysis on banks based in Africa, the Americas, Asia-Pacific and Europe. The banks selected are the largest in their respective geographies by total assets.