A significant majority of financial firms have initiated processes to integrate climate risk into their broader risk management frameworks, according to a new survey released by business and financial markets information service provider Bloomberg, yet industry leaders appear to lack consensus on what they aim to measure, and very few firms are in the advanced stages of being able to assess climate risks.
For the report, Bloomberg surveyed more than 140 risk professionals and leaders from financial services firms around the world in May 2022.
According to the survey, most firms are aligned on the need to incorporate climate risk, with 85% reporting that they have begun climate risk assessment processes. The survey found, however, that fewer than half of respondents have moved beyond the planning phase, and only one in twenty reported being in advanced stages of being able to assess climate risk, including capabilities such as performing multi-scenario analysis based on variables including carbon, geolocation and weather data.
Additionally, firms appear to differ even on the objectives of climate risk analysis, with 22% responding that their main focus in climate stress testing would be to assess climate value at risk, while 20% would be aiming to determine valuation impacts at various time horizons, 15% examining default risk, and 16% not yet knowing what they want.
The survey comes as regulators are becoming increasingly focused on the risks facing financial firms from the physical and economic transition impacts of climate change. Last week, the European Central Bank (ECB) released the results of a climate stress test, indicating that banks are overexposed to climate risks, and have yet to sufficiently integrate these risks into their risk management frameworks. The Bank of England recently published its findings from its own stress test, finding that while banks and insurers will likely be able to ultimately absorb the transition and physical costs of climate change, the impact on these risks to their financial performance is likely to be very significant.
Regulatory pressure appeared to be the top driver for the firms’ assessment of climate risk, with 25% of respondents reporting that “regulation and disclosure requirements” was the main reason for considering climate risk in the investment process, followed by risk management at 19%. Despite this, however, 38% of respondents reported that investors and portfolio managers were the intended audience for their climate risk analyses, with only 21% citing regulators.
Zane Van Dusen, Head of Risk & Investment Analytics Products at Bloomberg, said:
“Most firms are at the early stages of implementing their climate risk frameworks, and even those who say they have a robust model will be making significant changes over the next few years as our understanding and consensus around climate risk grows. More and better data will go a long way toward improving firms’ ability to manage climate risk.”
Click here to view the survey results.
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