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A Global Benchmark Study on Climate Risk

From 2021 to 2022, Sia Partners conducted a global benchmarking study with Cadwalader, Wickersham & Taft to provide market feedback on the status and progress of climate risk, and its impact on the financial services industry.

Over 70 financial market respondents across banking, institutional investors, insurance companies and corporations participated in the study from the U.K., Europe, the Middle East, the Asia-Pacific, Canada and North America.  Peer groups benchmarked against each other included Global Systemically Important Banks (G-SIBs), U.S. Regional Banks, European Banks, Foreign Banks, and Investment Managers.

Participant Profiles:

  • 75% of participants have signed the Task Force on Climate-related Financial Disclosures (TCFD)
  • 95% of participants have activities in Wealth Management 
  • 88% of participants have activities in Retail Banking 
  • 91% of participants have activities in Wholesale Banking 

The study is broken down into the following topics:

  • Strategy
  • Corporate Governance, Finance & Budgeting;
  • Risk & Technology;
  • Regulation, Compliance & Legal;
  • Sales & Distribution; 

We will publish our full analysis on the above topics each week. 

Strategy

Risk Strategy

Globally, institutions have recognized the importance of developing climate risk frameworks. However, the maturity of these efforts is subject to significant disparity in maturity across geographical regions. Given the historical and ongoing differences between the U.S., Europe and Asia in terms of prioritization of carbon reduction among regulators, public policy markets, corporate citizens and general populations, there are differences in timing and maturity across regions.

  • 90% of participants have at least started the development of a climate risk framework.
  • 95% identified international frameworks as a priority for consideration demonstrating the need for regulatory convergence.
  • Only 16% of participants have fully embedded a climate risk framework across their organization.
  • U.S. Regional Banks were the only set of respondents where no respondents had fully completed development in some form of a climate risk.
  • G-SIBs noted there was a baseline of a global rollout but there were differences when geographies were newer to adapting these changes. Nearly 70% of the participants in this segment identified “regional requirements” as their most important consideration for proceeding.
  • The European peer group, a leader across all survey questions in the study, identified the lack of clear data as an element deferring the development and implementation of the risk frameworks. 
Climate risk framework used in organizations

KRIs/KPIs

Participants noted a series of obstacles in developing climate risk metrics. First, many firms had yet to identify, let alone collect the necessary data to build out risk or performance indicators. Second, numerous participants pointed out the lack of a standardized approach to metrics. Third, operationalizing the data capture and system workflow to produce the metrics requires upgrades to platforms which have not yet been developed. Finally, participants conveyed hesitation for establishing performance indicators due to the reputational pressure in achieving objectives.

  • 60% of European Banks indicated they had identified initial KPIs and KRIs for utilization.
  • The nearly 90% of G-SIBs with established metrics demonstrates commitment through their effort in collecting client data to contribute to their KRIs/KPIs and the cost associated with the use of third-party vendors.
  • U.S. Regional Banks are predominantly in the planning stage for the development of KRIs/KPIs with only 11% calculating KRIs/KPIs.
  • Carbon Intensity of Client Portfolios / Balance Sheets garnered the highest priority for internally tracked KPIs.
  • Green Debt Issuance garnered a high priority for KPI tracking across the European Banks, Foreign Banks and U.S. Regional Banks.
Organization defined measurable targets and KPIs

Risk Assessments

Less than 20% of the overall participant population had engaged business lines to perform risk assessments. While almost 40% of participant have begun the process, almost half of the participants have still not started the process. Efforts for conducting risk assessments and exposure mapping can take many forms with both top-down and bottom-up approaches as well as a hybrid approach including both, the process is heavily reliant on granular data sets and coordination across business units to manage risk correlations.

The low percentage of firms who have been able to define stakeholder impact maps across business lines is indicative of several factors:

  • For certain business lines, it is well understood that physical and transition risk will be drivers impacting credit risk, however the impact to market risk might be less understood. 
  • Limited data availability may require the use of proxies at the industry level and more rigorous analysis. 
  • The cultural shift in recognizing the risks associated with climate change may take time and require firms to establish robust training programs to educate business lines on how to manage their products and portfolios with a climate risk lens.
  • 50% of Investment Manager participants reported they have not begun assessments illustrating a maturity impasse for organizations focusing on product distribution versus activities in the 2nd line of defense.
  • 33% of U.S. Regional Banks have begun to perform risk assessments, however, 0% of U.S. Regional Bank participants have completed the activity.
Defining Stakeholder Impact Maps

Corporate Governance, Finance & Budgeting

Governance

The majority of the participants in the study, approximately 86%, have designated a corporate leader for climate risk. The G-SIB peer group consistently maintained a best practice, where all participants indicated a designation for a leader of climate risk.

A large group of organizations began strategy development in the front office without alignments from the 2nd / 3rd lines of defense. For example, the Investment Manager peer group identified significant responsibilities for management of climate risk to be placed in the hands of individual portfolio managers and would likely have limited formal responsibilities for anyone in the C-Suite.  

  • 43% have assigned the responsibility for climate risk to the Chief Risk Officer (CRO).

  • 26% of participants having delegated climate risk to another C-Suite-member.

  • 17% have designated the ownership role to another group.

  • U.S. Regional banks are behind the rest of peer groups in establishing a governance structure. Factors contributing to the latency include slow reaction to social sentiment, lack of regulatory pressure and a smaller level of climate risk exposures.

  • Only 11% of European Banks indicate not to have appointed a leader for climate risk.

  • 83% of Foreign Banks had assigned a leadership team for their climate risk efforts, however, several foreign banks noted organizations structures may not be identical in each region in which they operate and likely are modeled around the current or anticipated regulatory approaches. 

Graph showing percentage of assigned leader(s) responsible for climate risk

Internal Reporting

Collectively, firms were challenged in a few respects and while the infrastructure for traditional reporting exists, institutions are still identifying the suitable reporting formats and type of data to provide. Moreover, organizations with less advanced frameworks were concerned a formal process for distributing to the appropriate stakeholders may not exist, whereas for other public policy or regulatory requirements there would be clarity from working groups and committees as to the distribution of this reporting.

  • 39% of participants have fully matured a process for internally reporting climate risks.

  • 44% of G-SIBs distribute their reports at least, quarterly.

  • 71% of Investment Managers distribute internal reporting annually.

  • Relatively few foreign banks, 33%, have finished the development of internal reporting for climate risks, although the vast majority have begun the change process, likely attributed to their domicile in a region with advanced regulatory agendas.

  • Only 11% of European Banks indicate not to have appointed a leader for climate risk.

  • All European Banks have at least begun the process to develop internal reporting.

     

Graph showing internal reporting for climate risk exposures for the Board of Directors or Enterprise Risk Committees

Budgeting

A category which all peer group responded with majority affirmations, however, some institutions noted program mobilization tended to begin with the C-Suite, and not a specific risk category or line of business and therefore it often presented challenges for the initial funding of programs. Some institutions leveraged cost centers assigned to their ESG efforts, others specifically for climate risk, and some participants noted costs were absorbed in head count outside of a sustainable project budget. Participants beginning to mobilize large-scale program identified budget requests as being difficult.

  • 80% of G-SIBs and 78% of European Banks have allocated budget towards climate risk transformation projects or activities.

  • Investment Managers had a high response rate indicating they have no plans to allocate budget, however, many of those firms’ identified existing efforts with business units were already in place and as a result the governance efforts and budgeting has and will be part of the business growth strategy to expand product and the capacity for current first lines of defense to handle those issues.

  • 29% of U.S. Regional Banks have no plans to allocated budget towards Climate Risk activities.

Graph showing budget allocation towards climate risk  transformation projects / activities by organizations

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