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Banks need to accelerate practical implementation to meet climate risk deadlines

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Acin has today published a barometer charting the preparedness of the world’s leading banks and asset managers to meet upcoming challenges in managing climate change-related risks.

With regulatory clocks ticking for these organizations to embed climate risk into their financial risk management frameworks by Jan 2022, the vast majority of firms have acknowledged the need to act on climate risk and have made progress. However, independent research commissioned by Acin, produced from an analysis of their annual and, where available, sustainability and climate reports*, reveals that much remains to be done in terms of practical implementation.

Encouraging signs

The financial institutions analyzed display a clear and collective acknowledgment of the need to meet and address the risks posed by climate change. Two thirds (67%) of firms reference a corporate net zero target between 2025-50 in their reports. 14% of these organizations have gone further by setting a commitment to reach their net zero targets by 2035, some 15 years in advance of the global deadline set by the Paris Agreement.

In a further encouraging sign of progress, 70% of banks and asset managers reference alignment with the Task Force for Climate-Related Disclosures (TCFD) and its principles. Only 8% of the organizations make no reference at all to how they themselves were aligning or were planning to align with TCFD.

Many of the financial institutions analyzed are capturing, publishing, and acting on climate-related data today, as well as preparing for future impact of risks. 81% of these organizations publish detailed data on the impact of their own operations (business premises, air travel, etc.). And 60% of firms already conduct some form of planning to prepare for the impacts of chronic climate risk; many are undertaking scenario analysis and specific risk assessment exercises for areas most likely to be affected by climate risks.

Many organizations are also appointing or implementing new structures to enhance efforts to address climate change-related risk. 40% of firms reference a dedicated individual, team, or taskforce to focus on climate change-related risk in their latest reports, citing the ways in which these teams or taskforces are embedded within internal structures.

The big next step

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However, what is clear from the research is that there is still a long way to go. In general, firms are publishing limited data on the impact of their activities beyond the carbon footprint of their own operations. This suggests that although they are preparing for the impact of climate-related risks, they are not able to measure progress adequately at this stage or unwilling to make numbers publicly known.

For instance, data reporting around climate risk is still immature, with less than one-fifth (19%) of firms including detailed information within their reports. Less than one fifth (14%) of the organizations publish extensive (3 years) current and historic data on client (or investee) emissions in their reports. Only 40% of organizations are currently publishing some data and / or reference plans to begin publishing data on client (or investee) emissions in the future. However, nearly half (46%) make no mention of client (or investee) emissions data, suggesting that much more needs to be done before organizations can begin to meet their objectives and regulatory obligations to manage climate risk.

This is also reflected in the extent to which climate risk is embedded in risk management processes. Most firms make some reference to embedding climate risk within their risk management process. However, when it comes to implementation, progress is varied, with only 37% of firms referencing a mature approach to climate risk management, and nearly half (48%) intending to develop their framework in the future.

There are a number of ways these firms are approaching their risk management frameworks. The preferred approach is to integrate climate risk into existing risk management frameworks, with a number of organizations stating they have strengthened or will strengthen their framework with new guidelines and processes for managing climate risk. In addition to this approach, a few make specific reference to climate or environmental risk management frameworks that they are drawing from, such as the Equator Principles. However, a small number (12%) are taking a different tack by establishing or intending to establish a separate climate risk management framework.

Paul Ford, CEO at Acin, said: “It is encouraging to see evidence of banks and asset managers responding to climate change. That said, the research clearly indicates some tough work ahead. Commitments are an essential first step, but we know from experience that embedding risks and controls in an organization is challenging. Climate risk is an emerging discipline where roles and responsibilities may not yet be fully defined, and the nature of the risks transcend financial and non-financial. Staying on top of what is clearly emerging regulation is not easy either. UK and European regulators expect to see climate risk embedded in 2022, if firms are to avoid capital adequacy implications. Acin’s peer network and platform, along with our initial inventory of climate risks and controls driven by the latest regulatory guidance, are helping firms meet these challenges.”

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