Progress toward addressing climate change
Climate change was the top emerging risk over the next five years, according to bank CROs (91% selected that risk). While climate change has clear direct impacts on banks (e.g., the effects of more extreme weather events on their operations), it also is worth reviewing through a political lens. Climate-related policy objectives are woven – and debated – within the context of legislative and regulatory agendas, as recently seen by the process surrounding the US’s trillion-dollar infrastructure spending bill or, before that, the presidential executive order on climate change. Changing regulations are guiding or forcing many industries to re-invent themselves, such as the shift to renewable energy sources, sustainable infrastructure and electric vehicles. These all require significant corporate investments and financing for those investments.
The role of financial institutions in financing decarbonization is central to companies achieving a zero-carbon economy, and the extent to which the needed supply and demand for finance develops will depend at least partially on political and policy winds. Still, few financial institutions identify environmental and climate change regulations – versus climate change itself – as a top concern in EY’s recent Geostrategy in Practice survey of more than 1,000 CXOs, for instance. They may not fully recognize how the politics surrounding decarbonization will influence their client, customer and employee financing and insurance needs in years to come.
Length and depth of global economic recovery
While 83% of CROs view the global economic recovery as a defining risk in the coming years, executives need to consider similarly tracking the role of policy in influencing this recovery. Throughout the COVID-19 crisis, policymakers have faced trade-offs between prioritizing “lives” versus “livelihoods” – with significant implications for economic growth and financial market performance. Monitoring and forecasting fiscal and monetary policy evolution, as well as the future of trade protectionist policies, can help banks more properly prepare for various recovery scenarios.
Similarly, banks should continue assessing the (geo)political risks relating to how the economic recovery affects socioeconomic inequality within major markets. Those conditions have at times led to populist movements. Societal unrest, in particular, could be a blind spot for financial institutions, as only 23% view it as a top risk. Such unrest can create or prolong political stalemates on needed policy reform (e.g., on public infrastructure investments) or generate public discussion that quickly translates into new policy or greater societal expectations on companies (e.g., growing pressures on companies to appropriately address diversity and inclusion matters).