Banks see climate change as primary financial risk

June 29, 2021|Written by Camilla Schramek|Danmarks Nationalbank, European Central Bank

Over 91% of Chief Risk Officers (CROs) at private banks view climate change as the top emerging risk over the next five years, finds a major survey of 88 financial institutions in 33 countries. The 11th Ernst & Young (EY) and Institute of International Finance (IIF) bank risk management survey found that almost half of CROs also view climate change as a top risk requiring their urgent attention over the next 12 months.

“In the past year, we saw climate change rapidly ascend to the top of banks’ long-term risk agendas for the first time,” said EY Americas Financial Services Deputy Leader Mark Watson in a press release announcing the survey’s release. “Bank boards and senior management must remain resilient across a broader set of dimensions as the world adapts to a post COVID-19 world,” he said. “It’s clear that now includes climate-related risks, as well as other environmental, social and governance matters.”

The survey, which covers all areas of bank risk management, also finds that banks are still learning how to assess their exposure to physical and transitional climate risks. Just over half have a preliminary understanding of their climate change risks, and only 28% feel they have a “somewhat complete understanding.” Nearly 57% believe that climate-related skills will be the most important risk management skills needed over the next three years.

Growing research shows that climate-related risks are concentrated in specific sectors, geographical areas and financial institutions, representing a systemic risk to the financial system. Physical flooding risk concentrated in individual Danish banks threatens financial stability, found a study by Danmarks Nationalbank. Similar concentrated risks are found in some of the largest European banks, finds another analysis, with exposure to fossil fuel asset values exceeding the total equity of several major banks. A collapse in fossil fuel asset values therefore presents a real and present threat to European financial stability.

In the face of this threat, researchers and civil society groups have repeatedly called for banking regulation to mitigate this risk. Policy proposals include the expansion of system-wide climate stress-testing, the adjustment of capital instruments to account for climate-related financial risks and a “financial non-proliferation treaty” on fossil fuel finance. Other proposals recommend the use of systemic risk buffers to mitigate climate risks, the incorporation of climate criteria into refinancing operations, and changes to the Basel Accords to include and reduce the systemic dangers from climate change and the transition to a net-zero world.

The EY/IIF survey comes two weeks after European Central Bank (ECB) Executive Board member Frank Elderson revealed that none of the banks under the central bank’s supervision has met all expectations on climate risk assessments. “All banks have several blind spots and may already be exposed to material climate risks,” Elderson said, warning that banks’ climate risk assessments “will eventually influence their supervisory requirements.”

This page was last updated June 30, 2021

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