Last year, following the Bank of England's Supervisory Statement outlining expectations from financial service firms to ramp up their risk response to climate change, I wrote a talent blog exploring the steps that financial services firms should take to identify the required skills to manage climate financial risk.
We identified five areas for consideration in building a cross departmental team:
- Assess the strength of your risk teams and their ability to build simple scorecards or far more complex and long-term stochastic models.
- Speak to your CFO and review the experience of financial teams to understand any economic modelling or actuarial background.
- Across a subject where so many perspectives, biases and conflicts of interest are prevalent, consider where you will source the most valuable and accurate data from.
- Leveraging previous insurance sector backgrounds and experience to support the understanding of catastrophe and climate events.
- Better understanding your technology capability to act as a potential accelerator in risk identification and modelling.
Over the past four months, our work has given us further insight into the steps that front-runners in responding to the new requirements around climate risk are taking.
Board oversight and influence
- Placing climate risk at the top of the agenda
As far back as 2019, the Bank of England was urging boards to put climate risk at the heart of their agenda. However, a recent PwC survey highlighted that only two thirds of respondents felt it was a priority and only 50% had said their board had a good understanding of climate risk. It is clear that firms can gain a competitive edge over competitors merely by investing in board awareness sessions and by raising the profile of climate risk in the business.
- Developing a strategy for climate risk and sustainability
The strategy should reflect new longer-term horizons and be based on long term objectives. According to a couple of excellent WEF articles, the strategy should stand up to shareholder demands for positive returns and also the transparency of the digital age. Our recent blog ‘Reputation risk and greenwashing’ highlights some of the perils of overemphasising a company’s green credentials and ambitions.
- Boards should be appointing at least one SMF to hold responsibility for climate financial risks
The FCA’s guidance advises firms to identify where responsibility for other financial risks is managed and align (SMF) with that responsibility.
Risk, Regulatory and Finance
- Firms ahead of the curve in tackling climate financial risk have already set up a risk framework and have begun to understand their exposure using the Identify, Measure, Manage, Monitor and Report approach. Climate risk has become embedded in firms core capabilities and is a piece of the overall ERMF. Risk teams are also working closely with the business to assist on risk identification and stress testing.
- Compliance functions have added climate risk to their horizon scanning regime with legal functions picking up the responsibility for identifying climate related legal actions. In some cases, ESG programmes linked to climate financial risk have become the responsibility of legal functions.
- Chief Financial Officers are working closely with all business areas to develop financial planning and forecasting. This planning plugs directly into scenario testing and supports risk quantification.
Climate risk is already a hot topic across financial services in 2021. With the increased focus of regulators, investors, and central government, it is essential that firms do not place this in the “need to do but not a priority” category.
As the author Karen Lamb says, “a year from now, you’ll wish you started today”.
FourthLine helps firms to mitigate risk through recruitment, consulting and training solutions.
For further insights on getting started on implementing your climate risk framework, please download our insights deck here