Financial firms see climate risks as a top priority but lack consensus on how to effectively analyse climate concerns, according to a new survey by Bloomberg.
The research 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.
It found that 85% of firms have started assessing climate risk, however there is still a way to go with embedding climate into risk management frameworks.
Of that group, 37% are in the beginning of planning how to incorporate climate risk into models and governance, while 43% are in the mid-stage of integrating these measures like carbon emissions.
Only 5% 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.
Although 21% listed regulation as one of the main drivers for focusing on climate risks, 27% pointed to senior management as their top audience while 20% named investors as the main motivators.
Portfolio managers were the reason for 18% followed by traders on 13%.
Regulation and disclosure also feature prominently – for 25%- as the main climate risk considerations in their investment process investment process.
Senior management priorities including risk management was named for 18%, followed by performance at 15% and reputational risk, 14%.
Around 12% pointed to sensitivity and stress testing while it was client pressure for 9%.
However, there is still a way to go with embedding climate into risk management frameworks.
The survey said respondents were quite varied in what they are seeking from a climate stress test with 16% of not knowing what they want.
The remaining responses ranged across priorities including climate value at risk for 22% and valuation impact at different timelines, 20%.
Climate adjusted default probability was named by 15%, and climate risk scores at 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, incorporating climate risk outright is currently the lowest priority at 6%.
Instead, the top reasons for credit risk management were generating early warning signals (30%) and identifying credit risk developments as they may affect counterparties (28%).
Other factors included scenario analysis and stress tests (18%), and firm alignment on managing credit risks (17%), indicating firms continue to prioritise 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,” said Zane Van Dusen, head of risk & Investment analytics products at Bloomberg.
He said, “More and better data will go a long way toward improving firms’ ability to manage climate risk.”
