Industry bodies at a global level remain some way away from consolidating frameworks and standards, so it is likely that banks will have to navigate their way through a range of different methodologies in the short term. Risk leaders should work closely with colleagues in compliance to ensure they are on top of the changes that are starting to happen.
Having the right governance structures and processes in place can help. A dedicated management-level climate risk committee or, if that is not possible, an executive who reports directly or up to the CRO, is the ideal setup to ensure the subject gets the attention and focus it requires. For smaller organizations, however, this is often not possible and the CRO will have to shoulder the burden. In either case they should work closely with the ESG or sustainability leads to ensure climate risk is addressed in a coordinated way across the organization.
Key challenge 3: skills shortages
This links to the third challenge facing banks and CROs – a lack of relevant skills. Climate change is the third most important risk management skill in demand over the next three years behind cybersecurity and data science, according to survey respondents. However, executives with expertise in climate science and risk management are both thin on the ground and in high demand across all industries, so banks need to plan accordingly.
The obvious approach – especially given global talent shortages – is to train an existing risk specialist in climate science or vice versa but, either way, the desired result is not going to happen quickly. Third-party support from external experts will likely fill the gaps in the meantime.
A catalyst for change
While the challenges and risks are significant, banks have a once-in-a-generation opportunity to provide and benefit from products and services that will help to create a more climate-friendly and sustainable economy. Sustainable finance – any form of financial service that incentivizes the integration of long-term ESG criteria into business decisions, with the goal of providing more equitable, sustainable and inclusive benefits to companies, communities and society – is the driving force behind this development.
Survey respondents see significant opportunity in offering the likes of green/social bonds, sustainability-linked corporate loans, and green mortgages. Awareness and expectation are growing thanks in part to CROs’ work in analyzing the impact of climate risk on their organizations.