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Assessing Climate Risk Management in Financial Institutions

As the world grapples with the growing urgency of climate change, the financial sector is increasingly recognizing the importance of managing climate-related risks. However, not all financial institutions are on equal footing when it comes to addressing these risks. 

In a new report, the GARP Risk Institute delves into the evolving landscape of climate risk management by analyzing key trends from the past four annual Global Climate Risk Surveys. This report sheds light on the progress made by leading firms and the disparities that persist among institutions at various stages of climate risk management.

Table of Contents

The Path of Progress

The report highlights several key takeaways that paint a comprehensive picture of climate risk management across the financial industry:

1. Leading Firms Forge Ahead:

  • Firms acknowledged as climate risk leaders have made significant strides in all dimensions covered by the survey. These firms have been proactive in recognizing the implications of climate change on their operations and the broader economy.

2. The Narrowing Gap:

  • While leading firms have been at the forefront of climate risk management, the gap between them and their peers has been gradually closing over the last four years. This indicates a broader awareness and commitment to addressing climate risks throughout the industry.

3. Areas of Convergence and Divergence:

  • The smallest gap between top firms and others is observed in foundational areas, such as governance, strategy, and risk management. In these areas, many institutions have recognized the importance of incorporating climate risk considerations.
  • The widest gap exists in more quantitative dimensions, including metrics, targets, and limits; scenario analysis; and disclosures. These areas require more advanced analytical tools and expertise, which may explain the differences observed.

4. Board Engagement:

  • Leading firms are placing a high priority on climate risk discussions at the board level. Nearly 90% of these firms report that climate-related matters are on the board’s agenda at least four times a year. This level of board engagement indicates the recognition of climate risk as a critical strategic concern.

5. Comprehensive Assessment:

  • Leading firms excel in assessing climate-related risks and opportunities comprehensively. They are looking beyond the short term and focusing on longer time horizons. This approach allows them to make more informed decisions regarding climate risk mitigation and adaptation.

6. Staffing Levels:

  • More than half of the leading firms anticipate a significant increase in their climate-staffing levels over the next two years. In contrast, only a third of other financial institutions have similar expectations. This highlights the growing need for expertise in climate risk management and sustainability within the industry.

Collective Effort Needed For Climate Risk Management

The report underscores that climate risk management is an ongoing journey for financial institutions. While leading firms have set a strong example, the entire industry is making progress. Closing the gap in the more quantitative dimensions will require enhanced tools, expertise, and collaboration. As climate change continues to shape the global landscape, financial institutions are recognizing that climate risk management is not just a regulatory requirement; it is a strategic imperative for long-term resilience and sustainability.

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