Growing concerns about climate change have changed the perception of climate risk in the financial industry. In the past, analysis of climate-related issues was limited to sectors directly linked to fossil fuels and carbon emissions. Today, it is being recognized that climate-related risk exposures concern all sectors, including the financial.
While those risks might have been judged as intangible in the past, more and more financial institutions are incorporating the physical risks related to climate and weather-related events in their decision making and are seeking ways to support the transition to a low-carbon economy as well as prepare for any revaluation of assets that might be the result of that.
Climate Risk is expected to present several unique challenges as financial risks may be more extensive in breadth and scope as they are relevant to virtually all industries and geographies, resulting in very little diversification benefits. When the financial risks may be realized is highly uncertain and the magnitude of the future impact is likely dependent on short-term actions. Finally, there will be a knock-on effect on credit risk, market risk and operational risk. Regulatory bodies, such as the Bank of England, advocate a smooth and orderly transition to a green financial industry and are seeking ways to incorporate that in regulation. In addition, IORP2 requires pension funds to address climate risk for their investments so a broad impact is to be expected across the financial sector. Three climate risk professionals share their views on how such a transition should look and how the financial industry can prepare for the challenges from diverse viewpoints.