Do financial services firms have climate risk under control?

Acin commissioned independent research to assess the readiness of financial institutions to meet upcoming challenges in managing climate change-related risks. The research analyzed the latest annual and, where available, sustainability and climate reports of 63 of the world’s leading banks and asset managers across Europe, North America and Asia Pacific, published as of July 2021.

In 2020, regulators reiterated that financial institutions must consider climate risk to be a material risk and embed it into their financial risk management frameworks by January 2022.

According to the research 83% of the firms assessed acknowledge that climate risk is a major concern within their Annual Reports, however only 37% of organizations have a mature approach to climate risk management, and only 19% have published detailed data on their existing climate risk within their reports.

Climate risk is now a material risk, impacting financial and non-financial risk and spanning all major risk types. Climate risk impacts a firm’s own footprint, their future footprint and their response to physical risks caused by climate change. Physical risks occur because of the impacts of climate change such as a flood or drought. Firms face transitional risks as they shift towards a low carbon future to meet governmental and regulatory expectations as well as their own net-zero commitments.

This research brings to light what many in Senior Management Functions with personal accountability are already aware of. 92% of firms have aligned with Task Force on Climate-related Financial Disclosures (TCFD) recommendations. However, there is a gap between addressing climate risk on paper and building a comprehensive climate risk framework. Only 40% of firms have published or plan to publish data on client emissions in the future, signalling discrepancies between their organisational footprint and the wider impact their investee portfolios and activity have.

Post Cop-26, financial services firms are expected to have a systematic rehaul to reflect the transition to net-zero: 67% of firms have referenced a net-zero target between 2025-2050 in their reports. The current cat and mouse relationship between regulators and firms racing to ‘comply or explain’ has been blighted by a lack of understanding and alignment around what practical implementation of climate risk and control management looks like. Climate-related regulation is still evolving and there are no backlogs of legislation, policies, and definitions against which financial services can bolster themselves. Until now, beyond reliance on subject-matter-experts and consultants, there have been limited options to support compliance. Attempting to build and maintain an in-house capability often fails to deliver objectivity or peer comparisons.

Increasingly, regulators are encouraging firms to use specialist regulatory technology (RegTech) and risk technology (RiskTech) to manage climate risk effectively and conduct peer analysis to gain more actionable insights and raise standards. The regulatory expectation is to integrate climate risk into existing risk management frameworks. Several organizations have stated that they have strengthened or will strengthen their framework with new guidelines and processes for managing climate risk. Yet, the research shows only a relative minority are taking steps to strengthen their framework.

Are you comfortable in your ability to demonstrate that you are effectively embedding climate risk management?

Read our September 2021 Climate Risk Research Report’.

About Acin

Acin has a comprehensive, pre-built risk and control quick start library of inventories constructed through industry consultation and mapped to regulatory guidance, to provide immediate value and accelerate impact. Easily and proactively demonstrate to the regulator, auditors, investors, shareholders, and boards that you are managing climate risk – ahead of regulatory deadlines.

Contact us to learn how to get started.

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