Climate Risk Management

Navigating the complexity

As climate change has increasingly become a focus for investors and regulators, financial institutions have started to assess financial impacts of climate change on their businesses. These assessments, often strategic in nature, now need to expand to include quantitative risk analyses, integrated into existing risk management frameworks.

Full financial impacts of climate change remain uncertain, as the extent to which climate will change is being shaped by current actions taken by governments, corporates and the wider community. However, impacts can already be felt today through shareholder pressure and shifting investor preferences.

To increase transparency on corporates’ exposures to climate change-related risks, the Task Force on Climate-Related Financial Disclosures (TCFD) delivered recommendations on how risks and opportunities should be reported in annual financial statements of public companies. ¹ Disclosure recommendations include governance frameworks, impact assessments, risk management processes and targets as they relate to climate change.

The Bank of England (BoE) issued further recommendations on how the financial services industry should reflect climate change in risk management frameworks, and banking regulators established a forum to enhance the resilience of the UK financial system to climate change.²

¹ The TCFD was established in 2015 by the G20’s Financial Stability Board, with the mission to develop voluntary, climate-related financial risk disclosures, focusing on the information needed by investors, lenders, insurers and other stakeholders.

² The Climate Financial Risk Forum (CFRF) is a joint initiative of the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA).