Climate change and bank risk management

Conference item


Bace, E. 2023. Climate change and bank risk management. Third Annual Conference of ASFAAG. Valencia, Spain 26 - 28 Jul 2023
TitleClimate change and bank risk management
AuthorsBace, E.
Abstract

Banks are reacting to accelerating climate change initiatives, where regulators (including the US, UK and Europe) are providing stimulus. It is becoming incumbent on banks to address climate change risk from a multi-dimensional perspective, encompassing policy on climate change risk management, a strategy incorporating this policy, a tactical approach to implementation, customer origination approach, balance sheet risk management approach, and regulatory compliance. This paper seeks to explore, based on practical experience, how climate change risk should be embedded into bank risk management.
Banks face an obligation to state and follow a Board-level approved Climate Change Risk policy. Drivers of this include: i) regulatory compliance: supervisors have pronounced on this so banks must comply with published guidelines; ii) market expectations: a growing majority of customers, shareholders and other external stakeholders are aligned with climate change and expect their bank to be proactive in this area; iii) business opportunity: there are growth and RoC-related benefits to adapting existing and/or implementing new products and services that address the global economy’s shift to more environmentally friendly business.
From a practical management-level and operational perspective, the imperative is to assess, understand and apply what this means for a bank’s risk management framework (RMF). Impacts are to be expected in the areas of governance, risk management, scenario analysis and stress testing and disclosure.
In theory at least, virtually all risk disciplines are impacted by climate change risk, including market risk, credit risk, liquidity risk, operational risk, and reputational risk. There are several elements to be addressed in an effective climate change risk approach embedded in a bank’s RMF: risk strategy, risk governance and frameworks, risk policies and standards, risk assessment and identification, risk measurement, appetite and limits, identifying and executing strategies, specific pricing for climate risk and climate related loan and deposit products, monitoring exposures, and reviewing and measuring performance.

Sustainable Development Goals3 Good health and well-being
4 Quality education
5 Gender equality
6 Clean water and sanitation
7 Affordable and clean energy
8 Decent work and economic growth
9 Industry, innovation and infrastructure
10 Reduced inequalities
11 Sustainable cities and communities
12 Responsible consumption and production
13 Climate action
14 Life below water
15 Life on land
16 Peace, justice and strong institutions
17 Partnerships for the goals
Middlesex University ThemeCreativity, Culture & Enterprise
Sustainability
Health & Wellbeing
Research GroupCentre for Enterprise, Environment and Development Research (CEEDR)
Corporate Social Responsibility and Business Ethics group
International Business group
International and Cross-cultural Management group
Diversity and Gender group
Employment Relations group
Professional Practice group for Leadership, Work and Organisations
ConferenceThird Annual Conference of ASFAAG
Publication process dates
Deposited05 Jun 2023
Accepted03 Jun 2023
Completed27 Jun 2023
Output statusPublished
Accepted author manuscript
File Access Level
Restricted
LanguageEnglish
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