Bank Climate Risk Management I

Moorad Choudhry

34 years: Banking and Capital Markets

In this video, Moorad delves into the vital realm of climate change risk management for banks. He explores why it's crucial, the various types of climate risks, worldwide regulatory demands and guidance, and how banks can effectively implement climate risk management. From regulatory compliance and market expectations to seizing business opportunities, this video provides a succinct overview of why and how banks must address climate change risks in their operations.

ESG Financial Markets

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Bank Climate Risk Management I

7 mins 32 secs

Key learning objectives:

Understand why banks need to manage climate change risk
Outline the types of climate change risks
Outline various regulatory requirements and guidance from around the world
Understand how to implement climate change risk management

Overview:

Understanding climate change risk management is now essential for banks due to regulatory compliance, market expectations, and business opportunities. Not only have regulatory bodies like the Basel Committee for Banking Supervision offered guidance, but stakeholders also expect banks to be proactive. Climate risks cover several areas, including physical risks like environmental impacts, transition risks due to a shift towards a low-carbon economy, and firm-specific reputation and balance sheet risks. Regulatory requirements from different authorities need adherence, with various guidelines being issued globally. Implementing climate change risk management involves understanding the external environment, formulating Board-level policies, meeting reporting and disclosure requirements, evaluating policy effects on Risk Management Frameworks, and integrating the revised framework into usual risk management processes. This holistic approach to climate risk offers a path to sustainable banking.

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Summary

Why do banks need to manage climate change risk?

Banks need to manage climate change risk primarily for three reasons: regulatory compliance, market expectations, and business opportunities.

Regulatory bodies have set guidelines for banks to manage climate change risk, thus ensuring compliance. Simultaneously, the market increasingly expects banks to align with climate change initiatives. Lastly, adjusting to a more environmentally friendly economy provides opportunities for growth and enhanced return on capital by adapting or developing new products and services.

What are the different types of climate change risks?

Climate change risks can be categorised into three types: physical risk, transition risk, and firm-specific reputation and balance-sheet liability risk. Physical risk refers to the actual environmental impact, such as floods and rising sea levels, which can cause damage to financial assets, and increase credit risk and insurance costs. Transition risk arises as businesses adjust to a low-carbon economy, affecting asset and collateral values. Lastly, firm-specific risks are tied to a bank's contribution to climate change, any failure in fulfilling global climate agreements, and their fiduciary duty.

What are the regulatory requirements and guidance around the world?

Regulatory requirements and guidance on managing climate risks vary globally. The EU's Sustainable Finance Action Plan introduces several regulations embedding sustainability into the financial system. In the UK, the PRA's Supervisory Statement and the Bank of England's climate-change stress tests aim for sustainability in mainstream finance. Germany's BaFin provides guidelines on managing ESG risks, including climate risk. Australia's SEC guides on integrating climate risks into disclosure requirements, and Singapore's MAS recommends incorporating climate-related risks into banks' stress tests.

How should banks implement climate change risk management?

Banks should implement climate change risk management by understanding its implications for their business and stakeholders, formulating a board-level ESG policy that considers bank strategy and customer policy. They should also address its impact on their operating model. Banks need to adhere to reporting and disclosure requirements related to the policy, assess the policy's effects on the Risk Management Framework, and ultimately, integrate the revised framework into their routine risk management processes.

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Moorad Choudhry

Professor Moorad Choudhry is a non-executive director at two UK financial institutions, having worked in London since 1989. He has experience in wholesale capital markets, treasury, ALM, and balance sheet management. Moorad's most recent role was as divisional treasurer at the Royal Bank of Scotland. He has also worked with Europe Arab Bank, KBC Financial Products, and JP Morgan. He is the author of "The Principles of Banking," which is currently in its 2nd edition.

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