Author: Acin – acin.com

2021 is the year that regulators became the driving force behind climate change response. Regulators are issuing clear recommendations that ensure financial institutions have adequately demonstrated preparedness, proving that their risk and control environment is complete.

Asset managers are taking climate change risk seriously. In December 2020 the Net Zero Asset Managers Initiative launched, aiming to galvanize the asset management industry to commit to a goal of net zero greenhouse gas emissions by 2050 or sooner. Already, the movement has 87 signatories, with $37tr assets under management.

Whether the final tipping point was our vulnerability to the natural world through the ongoing impact of the Coronavirus, this year has seen significant advances in the fight against climate change. 2021 welcomes the COP26 event, the drive towards the UN-convened Financial Alliance for Net Zero (GFANZ), and the reinforcement of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).

The value of global financial assets at risk from climate change has been estimated between US$2.5t and US$4.2t[i]. Regulated financial institutions must now accurately demonstrate that their physical and transitional risks are properly managed and accounted for.

If “bankers are the new activists”, Risk and Control Managers and Chief Risk Officers are the new eco-champions. Everyone must ensure that they are championing efficiency when disclosing their risks, controls, reports, and RCSAs. Not only to mitigate the impact of climate change, but to avoid financial and reputational repercussions.

How can you do this?

Specific metrics and reporting standards remain to be published, despite financial regulators across the globe recognizing climate change risk (CCR) in their risk assessment cycle[ii].

As discussed in Acin’s May 2021 Risk Intelligence Report, data-driven collaboration is vital – climate risk does not discriminate. We have mapped over 60 controls against risks and regulations advised by the Bank of England (BoE) and TCFD. Now is the time to act, to ensure that your risk and control inventories are fully calibrated and prepared for these changes.

“Robust risk management; scenario analysis; consistent, comparable disclosures; and forward plans can help ensure the financial system is resilient to climate-related risks and well positioned to support the transition to a sustainable economy.”

Gov. Brainerd, Federal Reserve

 Why now?

Climate risk management and reporting is new. Advisory supranational agreements have been introduced over the last two decades. Global financial supervisory bodies have only recently established binding regulation that will effectively police banks, asset managers and all regulated financial institutions.

The move towards a net-zero global economy is gaining momentum: US President Biden’s recognition of climate change as the Administration’s top priority is welcome news. US Banks have committed US$4.15tn to finance low carbon projects by 2030, while US asset managers have made more than US$19tn in commitments[iii]. The effort is global: Philippines’ Bangko Sentral 1085 paper defines senior management’s responsibility to effectively disclose their climate change resilience, becoming effective within three years[iv]. In the UK, by the end of 2021, the PRA will have defined climate-related risks under the responsibility of Senior Management Function (SMF) holders and be mandatory to disclose in RCSAs[v].

This political and regulatory alignment creates and opportunity to determine a set of global standards for CCR assessment, front to back, with data-driven scenario analysis and comparative oversight across all participating financial services.

 Have you understood which challenges you and your firm are facing?

Firms are exposed to varying levels of physical and transitional risk, depending on their geographical and regulatory stance. Look at Acin’s May 2021 Risk Intelligence Report for more detail.

The bar will remain a high one – CCR must be fully incorporated in daily risk management to maximise operational resilience, and be demonstrable to clients, regulators, auditors, shareholders, the public – and [their own] employees[vi].

Most firms in financial services are missing the tools to execute a complete scenario analysis. Scenario analysis identifies the top risks and opportunities, informed by trustworthy and quantitative data[vii]. The Bank of England’s 2021 Climate Biennial Exploratory Scenario’s objective is to test the resilience of the largest banks to assess the UK financial system’s exposure to climate-related risks[viii]. 

Acin’s Risk Intelligence use data-driven scenario assessments to notify network members of recent regulatory changes, and where they should be focusing their attention.

Ensuring that financial institutions have front to back visibility over their risk and control framework is crucial. Risk managers need to identify the gaps and inefficiencies in their controls.

“Success means that we have put in place the frameworks, all the information, the tools, the markets, so that every financial decision takes climate change into account.”

Mark Carney, UN Special Envoy for Climate Change and Finance

 Can you evidence that you are effectively managing climate risk?

Get your May 2021 Climate Change Risk Intelligence Report here

Acin’s unique data-driven network insights can enable you to see how your firm’s CCR and control environment compares to your peers, helping you better assess your risk appetite, tolerance, and operational resilience. Are you looking to pioneer the way for your organization?

Email [email protected] or call us on +44 (0)20 3728 8585 to learn how to get ahead of the curve.

[i] https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/banking-and-capital-markets/ey-climate-change-and-investment.pdf

[ii] https://www.omfif.org/wp-content/uploads/2020/02/Tackling-Climate-Change.pdf

[iii] https://www.ft.com/content/050279bf-e97b-44ac-91c3-98ea7b9b5f26?accessToken=zwAAAXj-Yj-4kc8FAnm_6XtErNORw5jqe5tfJg.MEYCIQDuQHZNY3IoUu7gTi4bEy4xUw2RPrvkjuaGHMoOUn2bsgIhAK9PQ_imQz2BdJ3o2BhqbTV7TpIO8DyO_TW4ogkhUzST&sharetype=gift?token=dfb241a4-f3e3-4785-bc24-7f8960c39bbc

[iv] https://www.responsible-investor.com/storage/inline/C1085.pdf

[v] https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/letter/2020/managing-the-financial-risks-from-climate-change.pdf?la=en&hash=A6B4DD1BE45B2762900F54B2F5BF2F99FA448424

[vi] https://www.forbes.com/sites/mayrarodriguezvalladares/2020/12/20/all-us-bank-regulators-should-require-banks-to-incorporate-climate-change-risks-into-their-risk-management-frameworks-and-disclosures/?sh=54ea83383f72

[vii] https://www.unpri.org/pri-podcasts/real-assets-investing-and-climate-change-implementing-the-tcfd-recommendations/7517.article

[viii] https://www.bankofengland.co.uk/climate-change