Peer-to-peer exchange: Climate Risk Management

The second of the five voluntary principles of the Mainstreaming Climate in Financial Institutions is to MANAGE climate risks. Assessing and actively managing financial exposure to the physical impacts of climate change and transition of economies is now an important part of modern-day risk management for financial institutions. Therefore, Principle 2 emphasizes the importance of understanding and addressing climate change risks to an institution’s existing portfolio and operations, as well as pipeline and future investments. Several approaches and tools have been developed for different types of institutions to conduct analysis at portfolio, project, asset, counterparty, and country level. Each institution’s risk management processes will differ according to their needs; however, it is becoming increasingly important to ensure that physical, transition and liability climate change risks are considered as part of organizations’ broader risk management process.

This webinar was an opportunity for FI professionals from risk, strategy, and climate/sustainability departments to share their own experiences and hear from their peers.

Agenda of the Webinar:

• Introductory remarks (Secretariat) – 5 minutes
• Presentation (Secretariat) – 5 minutes
• Roundtable open discussion – 40 minutes

Participants were invited to share their experience on a voluntary basis. 

Proposed guidance questions:

• How are you currently assessing climate-related financial risk and incorporating these assessments into your strategies and operations? What were the latest developments?
  • What methodologies do you use around transition risk, physical risk, and liability risk management?
  • How do you use scenario analysis?
  • What data sources do you use?  What were the latest developments you identified?
  • Do you use transition plans in your risk assessment?
  • Do you work with consulting firms? What are the pros and cons you identified?
  • How do you link portfolio and counterparty climate change risk assessments?
  • Do you link risk and alignment assessments? How?
  • Which climate considerations impact credit ratings / financial risk assessment and how?
  • How do you integrate climate risk management into your institution’s processes?
  • Internal uptake: what specific training / communication tools on risk assessment did you develop for internal and/or external use?
• What has been working best for you?
• What are the key barriers you have encountered and how have you overcome them?

Concluding remarks – 10 minutes

Summary:

• The International Development Finance Club, Crédit Agricole, FMO, Proparco, Yes Bank, shared their experiences.
• Many financial institutions are using different categories of climate risk assessment tools: both internally developed as well as market tools. At portfolio level, FIs are in the process of calculating financed emissions of portfolios (starting with carbon intensive sectors such as energy production portfolios). At the project and counterparty level, institutions are creating parameters in credit appraisal of clients using GHGe, net-zero targets, exposure to physical risk events. In the absence of quantitative data, scoring techniques are often used to measure climate risks.
• Institutions noted the difficulty to implement systematic climate risk management processes based on qunatitative assessment. Most participants indicated that they rely on qualitative assessment, taking into consideration transition plans or climate strategies of clients. This process is reenforced with clients that are exposed to liability risk, such as those in the oil and gas industry. Absence of credible net zero trajectories can also be a driver to disengage from a client and lead to divestment.