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Climate risk is a corporate priority, but little consensus on how to act

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Despite growing regulatory focus on climate risk, only 5% of firms have advanced assessments including a range of variables from emissions factors, different scenarios and impact of extreme weather.

  • Firms are focused on the financial impacts of climate change, but most have a long way to go in terms of effectively modelling and monitoring this risk.
  • Companies are increasingly aware of the need to model climate risk but don’t know how.
  • 85% of companies are starting to engage but, of that group, 37% are only starting out. 15% have not begun to engage at all.

The numbers come from a survey by Bloomberg. The survey was conducted in May 2022 during Bloomberg’s Risk and Regulation Week event and polled over 100 senior executives from financial services firms and corporations around the globe.

The results indicate that firms are aligned on the goal of incorporating climate risk into their broader risk management frameworks for much more than regulatory compliance but lack consensus on how to effectively manage and report on these risks.

Most respondents (85%) indicated that their firms have started assessing climate risk but of that group, 37% are in the early stages of planning how to incorporate climate risk into models and governance, and 43% are in the mid-stage of incorporating climate into risk management and governance analysis based on measures like carbon emissions.

Only 5% of respondents indicated that they are in the advanced stage of having comprehensive data and multi-scenario analysis based on a variety of climate variables like carbon emissions, geolocation data, and extreme weather events.

Regulators are increasingly focused on better understanding the financial risks arising from climate change, and 21% of respondents said regulators are the intended top audience for their climate risk analysis.

However, a larger number of participants listed senior management as their top audience (27%), followed by investors (20%), portfolio managers (18%), and traders (13%). This indicates that climate risk is not just a compliance exercise, but instead a priority to incorporate into proper risk management frameworks.

When asked about what is driving firms’ climate risk considerations in their investment process, it was unsurprising that regulation and disclosure requirements were driving the majority of action, yet there were a number of reasons which span different priorities of senior management. In terms of priority the drivers of action were:

  • regulation and disclosure requirements at 25%,
  • risk management at 18%,
  • performance at 15%,
  • reputational risk at 14%,
  • sensitivity and stress testing at 12%, and
  • client pressure at 9%.

This further evidences that firms have a variety of reasons for considering climate risk, with regulations being only one piece of the puzzle.

There is still a way to go with embedding climate into risk management frameworks and companies continue to struggle with understanding why they should implement various options – and what they should be learning from them. In terms of a climate stress test, for example, respondents were quite varied in what they are seeking from such a test, with 16% of respondents not knowing what they want.

In terms of identifying what they wanted to learn, corporate responses ranged across priorities including:

  • climate value at risk (22%),
  • valuation impact at different timelines (20%),
  • climate adjusted default probability (15%), and
  • climate risk scores (15%), indicating a significant lack of consensus on how to evaluate and report on climate risk.

While it is widely understood that climate-related risks may have an outsised impact on firms’ credit risk profile, when asked about firm’s top priority for credit risk management, incorporating climate risk outright is currently the lowest priority (6%).

Instead, the top priorities for credit risk management were listed as generating early warning signals (30%), identifying credit risk developments as they may affect counterparties (28%), scenario analysis and stress tests (18%), and firm alignment on managing credit risks (17%), indicating firms continue to prioritize other factors over climate in their credit risk frameworks.

“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,” said Zane Van Dusen, Head of Risk & Investment Analytics Products at Bloomberg.

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