Point of View

BFSI firms must update their approach in order to measure and manage climate change risk

March 19, 2020

The first step for all business leaders looking to futureproof their operations against the climate change risk is engaging with the right partners—across enterprises, academia, policymaking, service providers, education, and civil society—and better-communicating what business metrics and timeframes they care about the most. This requirement is especially necessary in the banking, financial services, and insurance (BFSI) sectors. At a recent Cambridge University Centre for Risk Studies event, BFSI leaders were united in not having the answers to quantifying climate change risk, and they are calling for partners’ help.


The BFSI sector’s measurement and management of risk must shift from a sole focus on markets and credit to include operational risks: geopolitics, cyber risk, and crucially climate change risk. Climate change brings broadly three types of risk: physical (business or supply chain disruption by extreme weather, for example), liability (the contribution of business operations to climate change), and transitional (the risk to businesses as the world combats climate change). The science and standards of quantifying climate change risk are yet to be established in BFSI; it doesn’t fit banks’ established risk management frameworks, which have, for decades, centered on good governance models and math.


Banks have considered reputational and corporate social responsibility (CSR) risk for some time—but now need to quantify and manage the risk of climate change


Climate change brings risk to people, nature, and business. Challenges are increasingly prevalent for BFSI firms, which must reassess their views and risk calculations of extreme weather, business disruptions, social attitudes and consumption, energy transitioning, attribution and liability, investor sentiment, stakeholder and regulator accountability—this list goes on…


“Banks are getting up to speed with climate change risk—but boards are still having qualitative conversations; they’ll be frustrated until they get numbers and tangible consequences.”

—Colin Church, Chief Risk Officer EMEA and head of climate change risk, Citi


Enterprise leaders are desperate to have the conversation around climate risk—and so are the BFSI leaders who work with them. But in order to help, BFSI firms must engage their partners to help them understand and factor in climate change to quantify risk; but BFSI leaders say that they don’t have the tools or the knowledge to change on their own.


Addressing climate change has moved from the “what and why” to the “how,” and business leaders feel both the urgency and uncertainty


Church added: “Climate change has profound implications for capital allocations—and C-suites want to have the conversation.”


Despite the demand coming from BFSI clients’ C-suites, Zoe Knight, head of HSBC’s Centre for Sustainable Finance, lamented how they have the power to influence global response, but still need to better understand climate change risk:


“We know the risks and broadly how to solve the problem—but don’t know the speed and scale of implementation.”

—Zoe Knight, head of HSBC’s Centre for Sustainable Finance


Knight highlighted the issues facing all institutions in repricing risk in light of climate change, particularly the whole BFSI sector’s exposure to what they deem as high impact carbon sectors: “We know the current position, but not the future—and want more data to signal the coming speed of change.”


BFSI companies need consistent scenario setting and guidance when it comes to interpreting climate change predictions. Herein lies the problem—BFSI leadership craves certainty, but certainty is not something climate change is ever going to bring. Instead, the right partners will help BFSI firms manage this uncertainty, but these partners must know the industry they’re trying to help.


BFSI firms need partners who know climate change and the industry


Climate change is an amplifier of existing risk types—there is not just one risk and one response for all sectors, even under the BFSI umbrella:


“Risk differs across BFSI firms—they all need different data and scenario modeling based around their balance sheets.”

—Jo Paisley, Co-president, Global Association of Risk Professionals (GARP)


The need for dual expertise extends beyond climate change risk to carbon offsetting. There was a call for academics to define best practice—as business leaders in all industries remain confused as to the most effective form of offsetting; this confusion is one reason many firms remain stuck in a “greenwashing” phase rather than tangibly addressing their contribution to climate change.


The Bottom Line: With regulators slow to react, BFSI firms don’t want to be the first mover on climate change—but the industry’s leaders will find the right partners to help them quantify risk and make confident decisions.


BFSI leaders were united in the concern that regulators are not moving fast enough and see greenwashing as being an inevitable symptom. Groups like Greenpeace are, however, starting to dig underneath and find out whether companies’ “sustainability” disclosures stack up to their voting records.


Boards are firmly thinking about the need to halve emissions this decade along with planning for the longer-term 2050 net-zero target. The exact timing and look of the transition may not be predictable, but it’s happening. BFSI firms have the influence to significantly guide this transition; they can’t do it alone. It’s not a simple case of divesting from fossil fuels at the click of a finger. BFSI firms need partners in all sections of society to help fill their knowledge gaps, which keep becoming more specialized and more in demand as the climate crisis worsens. Partners must be clearly briefed on BFSI’s key metrics and timeframes to alleviate C-suites’ and boardrooms’ frustrations at the anecdotal nature of current climate change risk conversations so that they can make decisions based on quantified financial predictions.

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