‘It is critical that financial firms recognise the race to net-zero has started’

‘It is critical that financial firms recognise the race to net-zero has started’

Bank of England (BoE) executive director Sarah Breeden has warned that banks and insurers are ‘significantly underestimating the potential impact of climate change on their business’ whilst speaking at a recent webinar at Edinburgh University.  She explained it is “critical that financial firms recognise now that the race to net zero has started,” adding: “In support of their ambitions, and consistent with our expectations, they need to run climate scenarios as part of business as usual risk management and embed climate risk management within day-to-day decision-making.” Scenario analysis will help institutions identify companies that are boosting their green credentials and it is important to look at ‘both physical and transition risks coherently’ as they undertake analysis to formulate a strategic response.

Sarah Breeden went on to confirm that ‘this is unfamiliar territory for most central banks, businesses and the financial sector. It is however territory we all need to get familiar with if we are to find the right climate path.’

We have been talking for some time about the need for financial institutions to identity climate risks by looking ahead to the future and not being limited to when extreme events such as flooding happen. By then the damage has been done, impacting lending books and future insurability of homes. Closing her speech Breeden poses the question ‘What will the impact be on the financial sector, and constructively, how can the financial system play a role in climate mitigation and adaptation?

She concludes: “Through climate scenario analysis, we have seen much closer collaboration between different groups of academics, other specialists, the financial sector and businesses. This has led to some fantastic work and insights that can drive the action we need now. If we are to rise to the climate challenge, we need to continue in this spirit and tackle some of these big outstanding questions together. In the race to net zero everyone needs to participate, and there are no silver medals. Do join the team.”

This is a team we have long been championing, talking about the importance of using expertise to not only deliver climate risk data but provide long-term solutions to support banks future time horizons and fully embed this analysis into both residential and commercial lending books. We are seeing a huge cultural shift because risk managers must assess climate risks that lie in the future rather than relying on historical data alone. Most banks have joined the race to show their green credentials and promote ESG and some have already taken the first step by obtaining data but how many are digging deeper, embedding climate risk analysis into their systems? Are they making the right climate change decisions at new loan originations? They need to understand what this data means to current loans and what needs to happen to future loans? Momentum needs to create progression not a sticky plaster.

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