Challenges so far
A realignment of the financial system is vital to enable needed transformations to overcome risks that climate change poses for the entire financial system, especially for the year ahead. Across the globe, banks remain hindered by a lack of common definitions and standards for climate-related data and financial products that prevents market participants and regulators from managing climate risk.
Challenges ahead factor in that CROS must understand the physical risks to their businesses. Advances in technology and potential regulatory and policy changes must be factored in to gain a clearer picture of the future. Furthermore, advancing industry standards are accumulating with the need for banks to abide by them. To commence, financial institutions are exploring methods for quantifying climate-related risks with an emerging awareness to integrate knowledge into financial decision-making and disclosures.
What happened in 2022?
Climate risk has become a top priority in all world regions, but 2022 was a challenging year for policymakers fighting climate risks. Central banks were able to improve guidance and regulation, with banks needing to follow increasing regulatory propositions, including the Basel Committee on Banking Supervision (BCBS), which has climate change on its agenda. While the Basel Committee creates guidance, regulators within the US build up risk management requirements that either draw from or mirror the BCBS thinking. The US has several bodies responsible for various parts of the financial system, and 2022 has seen progress from each. The U.S. Securities and Exchange Commission (SEC) proposed rules to enhance and standardise climate-related disclosures for investors requiring firms to disclose a range of climate-related information, including details of scenario analysis and strategies for risk identification and mitigation. Moreover, the Federal Reserve (Fed) released climate-related financial risk management principles for large financial institutions to prepare banks with $100B or more in assets to incorporate climate risks into their existing risk frameworks and create long-term climate risk strategies.
The results of the ECB’s climate risk assessment involving 186 large banks combining assets of €25 trillion found that virtually all the institutions need to make far-reaching and enduring efforts to develop consequential, granular and forward-looking approaches to manage climate-related and environmental financial (C&E) risks. Furthermore, the ECB released a guide to banks built on the findings of the stress tests earlier in 2022. The best practices are materiality, business strategy, governance and risk appetite, and risk management. Once again, the drive is for banks to identify material risks and encode these into their existing frameworks and lines of defence. In addition to the U.S. and the EU, central banks worldwide are creating expectations for their regulated institutions to analyse, manage and report climate specifics risks. Banks need to include climate scenario analyses within strategy and risk management practices, with disclosure a continued pressure into 2023 by regulators.
Expected regulations in 2023
As climate change will continue to centre stage on the global regulatory agenda in 2023, financial authorities will introduce new disclosure requirements for banks, heighten their expectations for lenders' risk management and contemplate new prudential rules. The financial system must meet regulators, central banks, supervisors and Ministries of Finance expectations, which increasingly focus on reporting climate-related risks. Regulation advancement is varied across the globe. The analysis of climate-related risks is more advanced than in others explored below:
- New Pillar 3 disclosure requirements, part of the global Basel framework, on environmental, social and governance risks will require some 150 European banks to publish a raft of qualitative and quantitative information on transition and physical risks, exposures to at-risk sectors and lending to green activities on a semiannual basis.
- The first reporting deadline for principal adverse indicators (PAIs) KPIs at the entity level has been confirmed as 30 June 2023.
- The supervisor expects lenders to fully assess the impact of climate and environmental risk on their activities by March and to incorporate that into their governance, strategy and risk management plans by the end of 2023.
- US climate stress test/mandatory climate scenario analysis. The US Federal Reserve is in the early stages of developing climate stress testing and climate scenario analysis for banks. July 31st deadline.
- Off the back end of the UK developing its taxonomy from the end of 2022, it is expected to outline its technical screening criteria in the coming months.
Banking conferences in 2023
26 February - 1 March 2023 I Las Vegas, NV (USA)
This conference isn’t one to miss, as it’s widely considered the world's most significant capital markets conference! It is a three-and-a-half-day event created by leaders within the finance industry representing various participants, including financial technology firms, agencies, investors, issuers, financial intermediaries, regulators, law firms, accounting firms, and trustees.
14-15 March 2023 I London (UK)
See cutting-edge fintech that financial institutions can deploy now. Hear from experts who can help you plan for a digital future. Connect with people who can take your business to the next level.
- Connect CFO Spring Leadership Summit
20-24 March 2023 I San Diego, CA (USA)
Get actionable insights and strategies from influential finance brands and voices at Connect. In-person attendees receive access to all programming and speakers, face-to-face industry networking opportunities, one-on-one meetings with solutions providers, one-night luxury accommodations, travel reimbursement, and an accessible open bar!
- Risk USA Spring
13 April 2023 I Boston, MA (USA)
To cover the most pressing issues facing next-generation risk managers and provide the practical, forward-looking insights and innovative solutions needed to get ahead in the new era of risk.
- ESG & Climate Risk Summit Europe 2023
7 June I London (UK)
The event will gather senior risk management and investment strategy decision makers from asset managers, hedge funds, life insurance firms, pension funds and investment banks in the UK and Europe online, guaranteeing that you gain new ideas, new connections and a new perspective on ESG risk management and climate risk.
11-13 September 2023 I New York, NY (USA)
60+ innovative demos. 100+ expert speakers. 2,000+ influential attendees (50%+ from financial institutions). The connections and ideas you need are at FinovateFall.
- ESG & Climate Risk Summit USA 2023
19 October 2023 I New York, NY (USA)
Delivering practical takeaways and driving best practices in ESG, climate risk and environmental risk management to achieve improved market confidence, brand reputation and higher shareholder value.
- Money 20/20 Conference
22-25 October 2023 I Las Vegas, NV (USA)
Money20/20 was founded in 2012 and has since earned its position as one of, if not the, leading global stage where finance stories unfold and the future is shaped by the attendees who walk away from it. Attend in 2023 and experience payments, banking, fintech, and financial services industries getting together to collaborate and learn from each other.
What’s happening next?
For 2023, it is crucial to include critical actions by regulators and banks, such as climate-related scenario analysis and climate stress tests, to help integrate climate risks into broader risk management frameworks and identify short-term impacts for organisations. Such as, disclosing information related to climate-related financial risks is essential to ensure climate risks are measured and managed effectively. Enabling financial regulators and banks to improve their understanding of climate change impacts on their organisations, disclosure of risk and opportunity to investors, capital providers, customers, counterparties, markets and regulators. Unlike conventional stress testing, climate risk analysis, at this stage, doesn’t focus on quantifying the possible capital needs of financial institutions relative to the regulatory thresholds. The earlier financial institutes begin to adapt their business models and risk management frameworks, the better they will be at adapting and adequately supporting their clients against the risks of climate change.
Financial institutes have a lot of ground to cover over the next year when integrating climate risks into existing operations and meeting regulations. For the U.S., regulators already set the mark in 2022, and this year, those efforts could come afresh with how quickly the Securities and Exchange Commission can finalise climate-related policies. Furthermore, the Fed also kicked off 2023 with the first-ever climate scenario exercise with six large big banks, including Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co, to understand the preparedness for the financial realities of climate change. Despite only focussing on showcasing the impact that climate could have on loan portfolios and commercial real estate holdings, it is a step in the right direction towards future climate scenario tests as a normalisation for big banks.
On top of that, climate change will continue to take a central role on the European regulatory agenda as the European Central Bank (ECB) is prepared to take enforcement action for banks if they do not meet climate risk expectations by introducing new disclosure requirements for banks. The ECB unveiling has exhibited that addressing climate change is a core focus point for its supervision banks as its top supervisory priority for 2023 – 2025. his includes performing targeted deep dives to follow up on identified shortcomings from the climate stress test and thematic review, reviews of banks’ compliance with climate risk disclosure requirements, and deep dives on reputational and litigation risk related to banks’ climate and environmental strategies and risks.
However, the distance and placement of energy assets in other countries bring enormous risks concerning increasing uncontrollable climate risk. Xlinks’ executive chair, Sir Dave Lewis, cautioned that recent political unrest that has seen off three prime ministers in less than six months had stalled its progress for one year. Besides potential geopolitical risk, climate risk is always a substantial risk for energy utility companies, such as flooding, earthquakes and droughts that cost Morocco over $575 million annually. International energy megaprojects of nations relying more on neighbours for energy are increasing, exampled by the world’s longest HVDC ‘interconnector’ Viking Link, exchanging electricity between Denmark and the UK with a 765km undersea cable supported by Siemens. The UK already has eight electricity interconnectors with a capacity that has risen to 8.4 gigawatts (GW) and is expected to double to 18GW by 2030. Hence, it is more important that utility companies assess the climate risk of their megaprojects to prevent the impact on energy infrastructure and their clients.