Blog article
See all stories »

Climate change risk management – whose job is it anyway?

Well, the answer is obvious isn’t it – it is “EVERYBODY’s, you would say. There lies the difficulty. One of the first management lesson’s is never to make any job “everybody’s” as it has two risks inherently. Either it becomes everybody’s and nobody’s at the same time, resulting in an impasse or the boundaries and the gaps in-between one group to another be so hazy that the ball might be dropped along the chain. Does it remind us of the story of “Everybody, somebody, anybody and nobody”? It is, however, an acknowledged fact that climate change management rightfully needs multiple stakeholders to manage it effectively and efficiently. In a sense it is everybody’s job but with clear delineation of areas of operation and accountability for the same.  

In this blog series, the focus is on the many facets of climate change as relevant to financial services industry, more particularly banks. This first one, however, is for context setting.

Arguably, climate change management is the next frontier with a steep learning curve. As NGFS (Network for Greening the Financial System) says on its scenario portal,” climate change is one of the defining challenges of this decade”. What complicates the canvas is that it is a global issue. The proverbial elephant that the six/n number of blind persons (read stakeholders) are trying to understand and address!! A true partnership across board, with clearly spelled out areas of execution and deliverables is a must. The intent is there, it is the direction and execution that is being worked on.

The test as well as the success depends on the ability of stakeholders to rationally define, accept and articulate the boundaries of individual responsibilities/accountability. The next step is designing a practical collaboration model between the participants. The idea is to empower each stakeholder to do well what they are best at. Constructive influence on each other is good & desirable but assuming more ability for themselves or over zealousness to “direct” others is self-defeating. The clarity with regard to both the intra team and inter team deliverables with realistic estimation of their circle of influence and a  candid acceptance of limitations is critical for this mammoth project to make positive headway.

The good news is that there is a clear movement towards this healthy trend of  detailing the boundaries. Three examples I came across recently give the right signals. The first is a news item with a quote of Federal Reserve Chair Jerome Powell that said” We have a role to play. It is a narrow one, but an important one”. The second one is Federal Reserve Governor Lael Brainard’s who promised that “its climate risk supervision will NOT include directives for banks not to lend to specific industries such as oil and gas”. Both healthy trends that signal realistically appreciating boundaries as well as limitations. Will pick these two themes in the next blog.

The third is a letter by Larry Fink, Chairman and CEO of BlackRock (Larry Fink’s 2022 letter to CEOs) where, while acknowledging that “capitalism has the power to shape society and act as a powerful catalyst for change, businesses cannot do this alone.. they cannot be the “climate police”, “governments need to provide clear pathways and a consistent taxonomy for sustainability policy, regulation and disclosures across markets.”

There is a host of good work happening on some of the themes viz developing taxonomy standards, regulation and disclosures norms in various markets. Case in pointer in standard taxonomy space is the EU (European Union) Green taxonomy, the European Commission states “The EU taxonomy would provide companies, investors and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable”. A second example is the “Common Ground Taxonomy – Climate Change Mitigation work of International Platform on Sustainable Finance (IPSF). In the disclosures space TCFD (Task Force on Financial Disclosures) is leading the way. The success depends on the ability to come up with and to enforce execution of a common superset across markets and geographies.

In the next blog, will look at the interplay of central banks and commercial banks, their planned paths to reduce climate change risks.

 

3411

Comments: (3)

A Finextra member
A Finextra member 28 February, 2022, 09:11Be the first to give this comment the thumbs up 0 likes

Thanks for sharing.

I believe , we have lofty goals but on ground for example whole banking financial institutions were caught unaware of Country Risk (RU vs UKR). 

Was wondering what is fall out in immediate and long term when head of state talking about Nuke threat ?

Richard Peers
Richard Peers - ResponsibleRisk Ltd - London 28 February, 2022, 10:48Be the first to give this comment the thumbs up 0 likes

Thanks for sharing your insights Saloni

Saloni Ramakrishna
Saloni Ramakrishna - Oracle - Bangalore 02 March, 2022, 01:25Be the first to give this comment the thumbs up 0 likes

Happy it resonated Richard.

.

Now hiring