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Climate Risk in the Financial Services sector, what does it mean for banks, building societies and other FS businesses?
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​Climate Risk in the Financial Services Sector

  • Publish Date: Posted about 2 years ago
  • Author:by MERJE

Following on from COP26 in 2021, it’s become clear that businesses will need to place increased focus on climate change, and their efforts to reduce its effects, in 2022 and beyond.

Bearing this in mind, throughout this year, we’re keen to explore insights around climate change, the risks that come with it, and the steps organisations can take to reduce their own carbon emissions.

This will include what our clients and candidates need to know, the impact climate change has across various industries such as Banking and Finance, and the benefits of addressing this complex problem.

Climate Risk: the state of play across the financial services arena

First off, we’re exploring how banking regulators have called for institutions to put controls over financial risks from climate change at the heart of their boards in order to assess if their capital buffers could cope with floods, fires and sudden asset price falls.

This all points to the fact that pressure is building on banks to play a more active role in helping global economies transition to a net-zero economy by 2050 and to bolster their own defences against potentially sharp falls in the value of company loans and other assets.

The Basel Committee of regulators from the G20 economies and other countries recently proposed its first set of principles for dealing with climate-related risks as debate continues over how far and fast regulators should move.

Indeed, some central banks and FS companies have already rolled out sustainability related initiatives, such as climate-related stress tests, in order to reach the UK Government’s net-zero targets.

In addition, Lloyds, the UK’s largest domestic bank, has set itself the goal of reducing the carbon emissions it finances by more than 50% by 2030. Another UK bank, Triodos, aims to finance only projects with a positive impact on society and the environment.

However, there’s still a long way to go. Calls from activists to introduce capital charges on banks which fund fossil fuel projects have been rejected by regulators, who say their job is to keep lenders stable in the face of climate fallout.

Basel's proposed principles focus on requiring banks to quantify climate risks and have controls to mitigate them. This includes the assessment and consideration of disclosure, supervisory and regulatory measures.

The principles would require banks to develop and implement processes to understand and assess the potential impact of climate risks on their business and strategy.

So why is a focus on fostering sustainability in the financial services sector so important moving forward?

At an event hosted by the Association of Foreign Banks, Environment Agency CEO Sir James Bevan warned that banks which failed to divest from coal and oil would be left behind.

He said: “There is no future in carbon. We must adapt or die. After COP, investments in coal, oil and other dirty energy are no longer safe bets. As more nations move to net zero, fossil fuels will increasingly need to stay in the ground. The market sees that and is on the move.”

Sir James added that the speed of the shift to a low or no carbon economy was likely to increase following the Glasgow Summit: “Throughout history, the most important and disruptive changes have gone through the same cycle. First they are unthinkable, then they look impossible. After that they begin to become feasible, and then they start to happen - slowly at first and then suddenly.”

So it seems the proof is in; steps to reduce emissions by large financial institutions, with their vast ecological footprint, are vital if we’re to go anywhere near achieving global sustainability and climate change ambitions.

However, building a sufficient level of knowledge about environmental sustainability is a complex topic, because these institutions differ from other larger enterprises in many ways, not least in their organisational structure and approaches to decision making.

This is why understanding what motivates and challenges banks to alter their practices is an important part of ensuring their commitment to working more sustainably.

There’s also that fact that the potential impact of sustainability on the long-term success of the financial services sector is too great to ignore.

Three reasons why banks and financial services organisations should embrace sustainable practices:

They’re the way to stay in business:

With mounting pressure placed on companies by governments, employees and customers to disclose how they are addressing environmental issues, all companies must be held accountable for their policies and practices. Recently the trend has included not only corporate reporting of environmental and social practices but also tracking and reporting by product. This trend means that companies of all sizes will increasingly be pressed to disclose sustainability-related information, including banks if they haven't already.

They attract and engage talent:

Institutions which are concerned about attracting talent should look at what younger workers value in the workplace. A colossal 93% of Gen Z (those born between 1996 and 2015) want companies to use their scale to push for environmental progress. So even though many larger corporations are currently in the sustainability spotlight, they have much to gain by further developing cohesive strategies.

They lead to greater innovation:

Sustainability is driving innovation worldwide and the benefit to businesses is that they can embrace the changes and become more willing to experiment and change course if required. To be seen to take action means that organisations will be able to move and adapt with the times, while carving out cleaner business practices.

Stay tuned throughout the year for more commentary on climate risk. If you would like to discuss this or any of the topics covered in our articles, get in touch.

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