85% of firms have started assessing climate risk, however there is still a way to go with embedding climate into risk management frameworks
Firms are focused on the financial impacts of climate change, but most are still in the early-stages of effectively modeling and monitoring this risk, according to a new survey by Bloomberg. The survey was conducted in May 2022 during Bloomberg’s Risk and Regulation Week event and polled over 100 senior executives from financial services firms and corporations around the globe.
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The results indicate that firms are aligned on the goal of incorporating climate risk into their broader risk management frameworks for much more than regulatory compliance but lack consensus on how to effectively manage and report on these risks.
The majority of respondents (85%) indicated that their firms have started assessing climate risk but of that group, 37% are in the early stages of planning how to incorporate climate risk into models and governance, and 43% are in the mid-stage of incorporating climate into risk management and governance analysis based on measures like carbon emissions. Only 5% of respondents indicated that they are in the advanced stage of having comprehensive data and multi-scenario analysis based on a variety of climate variables like carbon emissions, geolocation data, and extreme weather events.
Regulators are increasingly focused on better understanding the financial risks arising from climate change, and 21% of respondents said regulators are the intended top audience for their climate risk analysis. However, a larger number of participants listed senior management as their top audience (27%), followed by investors (20%), portfolio managers (18%), and traders (13%). This indicates that climate risk is not just a compliance exercise, but instead a priority to incorporate into proper risk management frameworks.
When asked about what is driving firms’ climate risk considerations in their investment process, regulation and disclosure requirements came in first with 25% of respondents. However, the remaining reasons primarily span senior management priorities including risk management (18%), performance (15%), reputational risk (14%), sensitivity and stress testing (12%), and client pressure (9%). This further evidences that firms have a variety of reasons for considering climate risk, with regulations being only one piece of the puzzle.
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However, there is still a way to go with embedding climate into risk management frameworks. Respondents were quite varied in what they are seeking from a climate stress test with 16% of respondents not knowing what they want. The remaining responses ranged across priorities including climate value at risk (22%), valuation impact at different timelines (20%), climate adjusted default probability (15%), and climate risk scores (15%), indicating a significant lack of consensus on how to evaluate and report on climate risk.
While it is widely understood that climate-related risks may have an outsized impact on firms’ credit risk profile, when asked about firm’s top priority for credit risk management, incorporating climate risk outright is currently the lowest priority (6%). Instead, the top priorities for credit risk management were listed as generating early warning signals (30%), identifying credit risk developments as they may affect counterparties (28%), scenario analysis and stress tests (18%), and firm alignment on managing credit risks (17%), indicating firms continue to prioritize other factors over climate in their credit risk frameworks.
“Most firms are at the early stages of implementing their climate risk frameworks, and even those who say they have a robust model will be making significant changes over the next few years as our understanding and consensus around climate risk grows. More and better data will go a long way toward improving firms’ ability to manage climate risk,” said Zane Van Dusen, Head of Risk & Investment Analytics Products at Bloomberg. “We are focused on providing clients with the tools and content to build models with crucial data around greenhouse gas emissions, supply chain, company ESG data, and physical location data, enabling more confident risk and investment decision-making.”
Bloomberg provides a number of sustainable finance solutions, offering data-driven insights to help investors integrate ESG throughout the full investment process and standardize company-reported and third-party ESG data. These solutions include ESG news and research content, carbon emissions estimates, indices, scores, analytics, and research workflows.
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