Fighting Climate Risk More Popular in Finance Industry Boardrooms, Survey Says

In GARP poll, 90% of boards were involved in sustainability efforts.

The financial sector is getting serious about fighting climate change, although it still has some distance to travel, a new survey indicates.

In a poll of financial services firms, 90% had board-level governance of climate issues. At the same time, 93% lacked a dedicated team to tackle climate matters, according to the Global Association of Risk Professionals (GARP), which did the survey.

Over just the past year, attitudes in the boardroom and the C-suite are more strongly favorable to combating climate risk, said Christopher Donohue, managing director of research and educational programs at the organization. “This year, boards are more involved” in the climate imperative, he said.

In the financial industry, he added, this is seen by the advent of green bonds and mutual funds dedicated to environmental, social, and governance (ESG) investments.

Also, Donohue pointed to the January letter that Larry Fink, CEO of BlackRock, sent to chiefs of the world’s largest corporations, calling on them to promote sustainability. Fink pledged that BlackRock, the globe’s biggest asset manager, would back out of coal investing, for instance.

Risk managers help companies head off things that might go awry. GARP, which is best known for instructing finance types how to steer clear in financial catastrophes, has expanded into risk-avoidance related to climate.

While Donohue felt that the national COVID-19 lockdown had robbed the sustainability movement of some momentum, he insisted that environmental considerations still were “part of the discussion.” The lack of air travel and less driving has noticeably reduced pollution, he said, “so at least people are thinking about it.”

In its second annual benchmarking study, GARP canvassed 71 big financial firms this year—including banks, asset managers, and insurers—and found that:

  • 90% of firms have board-level governance of climate-related risks and opportunities, up from 81% in 2019. But only 5% felt their firm’s strategies are resilient against climate change beyond five years.

  • A lack of reliable models and regulatory uncertainty are hindrances. When planning for the future, it helps to have years’ worth of history and statistics to draw upon. But the realm of sustainability is a new one. For that reason, a mere 14% of those surveyed used scenario analysis regularly for climate risk—that’s where you estimate what will happen going forward, often including a worst case. And, of those that used this analysis, only about half of them acted upon what it concluded.

  • Climate risk is not properly priced. Scant data is a major cause, which means that the effects of future mitigation efforts, such as imposing a carbon tax, are not factored in. Odds are strong that such a tax would boost prices to some degree.

  • The scarcity of dedicated climate risk teams is a substantial weakness. This situation likely stems from management not grasping that climate risk actually encompasses more conventional risks, such as interest rates, stock market moves, and business operations.

  • Three-quarters of firms have already debuted new products or services with climate change in mind, and a similar proportion (76%) intend to change existing ones or launch new initiatives.

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