With the 2020 United Nations Climate Change Conference (COP 26) hovering into view, banks have been warned that they will have to adjust their reporting, risk management and business models to take into account the devastating impact of global warming on the economy and financial markets.
The warning comes as the Governor of the Bank of England, Mark Carney, launched the ‘COP26 Private Finance Agenda’ at the Guildhall, London.
The Agenda stresses that to achieve net zero, every company, bank, insurer and investor will need to adjust their business models for a low carbon world, putting in place the right framework for reporting, risk management and returns.
Carney says that financial markets are uniquely placed to help support the transition required by amplifying changes in attitudes, consumer preferences and climate policy.
"Given the scale of the climate challenge and the rising expectations of our citizens, 2020 must be a year of climate action where everybody’s in, and that includes the world’s leading financial centre," he says. "To identify the largest opportunities and to manage the associated risks, disclosures of climate risk must become comprehensive, climate risk management must be transformed, and investing for a net-zero world must go mainstream.”
Recent analysis of the 12 largest banks and 14 largest insurers in the euro area shows that a majority disclose the impact of their business travel, commuting and other energy usage. Yet most of their exposure to climate-related risk is likely to stem from their financial activities. Only five out of the 26 partially disclose the impact of their financial assets, and none of them provide full disclosure.
In a speech to mark the launch of the agenda, ECB chief Christine Lagarde says that the Eurosystem is now reviewing the extent to which climate-related risks are understood and priced by the market and is paying close attention to how credit-rating agencies incorporate such risks into their assessments of creditworthiness.
"We will continue to evaluate the implications for our own management of risk, in particular through our collateral framework," she says. "ECB Banking Supervision is assessing banks’ approaches to climate risks and developing supervisory expectations on those risks."
Preparatory work is also under way for a macroprudential stress test to assess climate-related risks, with the first results expected by the end of the year. The stress test framework aims to assess how climate-related risks propagate through the real economy and the financial system.
Separately, the high-level Basel Committee on Banking Supervision recently established a Task Force on Climate-related Financial Risks.
- A set of analytical reports on climate-related financial risks, including a literature review, and reports on the transmission channels of such risks to the banking system and on measurement methodologies.
- The development of effective supervisory practices to mitigate climate-related financial risks.
The Committee also reviewed a stocktake of members' current initiatives in this area. A summary will be published in March.Finextra Research and ResponsibleRisk will be focusing on sustainable finance in investment and asset management at the second SustainableFinance.Live Co-Creation Workshop in March 2020.
Register your interest for the event, where you will be able to discuss the demand for sustainability, the challenges that lie ahead for sustainable investment and how firms across financial services and technology can achieve the UN’s Sustainable Development Goals by 2030.