Last year, the Bank of England released a Supervisory Statement (SS3/19) which outlines how they expect banks and insurers to ramp up their financial risk response to climate change.
Following on from this, in June 2020 the Climate Financial Risk Forum (CFRF) published their guidance to address four priority areas:
- Scenario testing
Even more recently we saw Anne Sweeney, the Bank of England’s Executive Director for Insurance Supervision, deliver a clear message to insurers on their need to improve resilience to climate change.
All this considered, we seem to be quickly ramping up to consultation and then prudential regulation in response to the material financial risks of climate change. At the very least, over the next 12 - 18 months, we expect to see significant risk management programmes in response to climate risk being built out.
Whilst the early publications have been pointed to the larger banks and insurers, the CFRF points out that these programmes will be vital for any firms with “large exposure to climate risk due to geographic or sectoral concentration”.
The direction of travel should cause insurers, lenders and investment firms to ask pointed questions of their risk management, credit risk and scenario modelling capabilities:
- Do we have a climate risk strategy or, as a minimum starting position, does our strategic risk explicitly call out financial risks posed by climate change?
- What is our credit risk in asset classes which are most at risk of devaluation due to climate change (e.g. residential / commercial property)?
- How have we considered the risk of what moves to a new ‘green economy’ will pose to existing customers in carbon heavy industries and their potential creditworthiness?
- How can we adjust our lending portfolio to climate resilient asset classes?
- What is the exposure of our investment portfolio to climate related litigation in the future?
- Is your scenario analysis robust enough to account for the suggested extension of your risk planning period to 30 or even 50 years?
- How can we demonstrate climate risk credentials to our customers and avoid negative reputation impacts?
At the moment, industry clients are fairly quiet on how they are planning to upskill or recruit to tackle their exposure to climate risk but should take their cues from the recruitment drives that have begun in Big 4 and boutique consultancies.
These advisory firms are gearing up by leaning on existing ERM Partners to create thought leadership and initiate new practices and then recruiting candidates with modelling, stress testing, scenario analysis and credit risk experience.
Once industry firms start to mobilise, it is certain that candidates with these skillsets will be in even greater demand than they are currently. You should consider how you might get ahead of the curve and build a robust cross departmental team now.
- 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.
- Do you have people from an insurance background who have experience of building catastrophe and climate models to predict financial risk?
- What expertise does your firm possess to help you create a technology solution and automate some of the modelling?
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.
For any questions on the above or to set up a call with our Talent Director, Daniel Waltham, please either reply to this email or book time in his diary below:
Daniel Waltham: book a meeting here.