Climate Risk – Jumping into the water

Tuesday 10th November saw the Global Association of Risk Professionals (GARP) host the first part of their Climate Risk Symposium.

Moderated by Jo Paisley, Co-President GARP Risk Institute, the panel saw a selection of supervisory and bank heavy hitters with Sarah Breeden (Bank of England Executive Director), Arthur Yuen (HKMA Deputy Chief Exec) and Kevin Stiroh (Federal Reserve Head of Supervision) representing the regulators, with Alan Smith (HSBC) and Colin Church (Citi) representing the latter.

There were plenty of insights throughout the 90-minute session, with some of the most significant outlined below.


Purpose of the Bank of England’s work and the 3 stages of climate risk management progress

Discussing the BoE’s work to date, Sarah Breeden highlighted three purposes of their approach to climate risk which were:

  • To shine a light on opaque risks
  • To understand where change needs to happen in firms because of climate change risks
  • To create a step change in climate risk management

As firms dive into exploring the risks and opportunities of climate risk to their strategy and operating models, they typically go through three phases:

  • Aspiring to change
  • Doing the heavy lifting via developing methodologies and exploring the data
  • Taking decisions today to drive different outcomes for tomorrow

Challenges faced by Asian firms

Arthur Yuen spoke about how Asian firms were playing catch up with their European and US counterparts, with efforts now starting on scenario analysis and stress testing. Highlighting the risk of a compliance nightmare for global firms with multi-jurisdictional reach, he called for continued and enhance dialogue between supervisors to coordinate a harmonious response and complimentary supervisory approaches between regulators.

He also noted 5 key challenges he was seeing from ASPAC firms:

  • Data access – As some corporates were not disclosing, this created a headache for banks who require that data to inform their own risk analysis
  • Data granularity and relevance – How can firms go about obtaining harder to access data at levels suited to their own exposures and region?
  • Coordination of stress testing – Harmonisation and reliance across jurisdictions should be easier by doing this now, at the start of the process, rather than when supervisory regimes diverge as expectations are set
  • Taxonomy challenges – Already existing challenges are compounded by further differentiation – e.g. Malaysia’s recent publication – from already divergent taxonomies (EU vs Peoples Bank of China)
  • Use of supervisory powers – There is a perception that firms need more regulatory incentives to prompt action – be that risk-weighted asset differentiation, or Pillar 2 incentives/disincentives

View from over the Atlantic

Kevin Stiroh highlighted the ongoing work of the Basel Committee and some of the myriad of complex and complicated challenges facing supervisors and firms. These includes data gaps, new models, long timelines, uncertain evolution of preferences and markets. With the Committee currently performing their Phase 1 stocktake of transition channels, the output will be a mid-2021 consideration of how well these are embedded in supervisory systems and whether further action (e.g. prudential treatment) is required. No position has yet been taken, however.


Get started and jump in the water – HSBC

Alan Smith, HSBC’s Senior Advisor for Climate & ESG Risk, highlighted the importance of getting started now – the ‘jumping into the water’ of the blog title. Setting out 8 steps, he called on firms to:

  • Set out your ambition and strategy
  • Understand what this strategy means for risk management
  • Get climate risk into the risk management framework
  • Articulate a risk appetite statement for climate risk
  • Start understanding scenarios and stress testing
  • Enhance your disclosures
  • Build an understanding of temperature alignment and what degree Celsius and “net zero” targets really mean
  • Understand the data – what are the requirements and gaps, and who can assist in supporting around this

Libor level coverage – a big bank journey

Colin Church, Citi’s Global Head of Crisis Risk Management & Climate Risk articulated some of the nuances around managing climate risk, including highlighting the scale as being like Libor transition. He articulated the longer-term vision – what is the long-term end state in BAU look like for something that is in project mode now? Things to consider include:

  • Reconciling regional / country responses moving at a different pace – With Citi facing into 15 different regulators and a combination of top-down vs bottom-up preferences, this can be challenging
  • Target Operating Models and what is the ultimate interaction between lines 1 & 2 – regardless of where things sit, embedding a process and culture across the organisation as a common cause is key, and something the EU is particular keen on banks implementing
  • The pace of implementing regulatory requirements – EU / UK are being used as pilot programmes ahead of the wider rollout
  • Functional structures – centralised, embedded in business units, or a hybrid of the two? Citi see a core group of SMEs with a taskforce who engage the rest of the bank

His final point was that as risk managers there needs to be clear articulation of the benefits of climate risk management to win hearts and minds.


Further panel reflections

  • Arthur Yuen – SME Challenges – Supervisory pressure may be required to get medium and small bank boards to approve new structures and focus on this.
  • Sarah Breeden – Accountability – Firms need a ‘hub and spoke’ approach, with one person responsible but with the whole organisation pulling together and stepping up.
  • Arthur Yuen – Accountability for climate risk is a lot like risk culture. Board needs to set the tone, but everyone needs to be on board and educated.
  • Sarah Breeden – Fully embedding – As it says on the tin. Firms need to build and then use the outputs to inform their operating model, not put reports on the shelf.
  • Kevin Stiroh – Do not confuse and use stress testing and scenario analysis interchangeably. Stress testing is more mechanical, scenario analysis allows a more narrative, ‘what if’ approach.
  • Colin Church – Firms need to act quickly. Seeing some of the challenges in the markets as they seek to evaluate fossil fuel equity should be a prompt.
  • Alan Smith – Where models are involved there is a process where we will have to make judgements.

Next steps

For further insights on getting started on implementing your climate risk framework, please download our insights deck HERE.


Topics: Featured, Risk Management, Flexible, Financial Climate risk, Climate risk

November 12, 2020
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Ross Molyneux
Written by Ross Molyneux

Ross specialises in risk management and regulation. He has worked extensively across non-financial and financial risk management engagements in his time in consulting in both the UK and New Zealand.