ESG Viewpoint: Climate risk management in the banking sector

Discover how the banking sector is managing climate risks.
May 2021

Nina Roth

Director, Responsible Investment

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Risk warnings

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

According to a report by the Rainforest Action Network, the world’s 60 largest banks have provided $3.8tn to fossil fuel companies since 2016, when the Paris agreement came into effect. Banks are under increasing regulatory and commercial pressure to protect their balance sheets from the impacts of climate change, and to contribute to the achievement of net zero greenhouse gas emissions by 2050 or earlier.

They must act to embed climate-related risks in their business operations and risk management frameworks. We have engaged banks and other financial institutions on climate risk management for over 10 years. As part of a recent dedicated engagement project, we targeted 30 global and regional financial institutions for engagement (24 based in developed markets and 6 in emerging markets) – mostly banks but also a handful of insurance companies. We asked them to:

  • Implement robust climate change governance frameworks
  • Enhance climate risk management
  • Provide robust disclosure

 

Our engagement resulted in a range of key findings, including:

  1. Increased attention to climate issues has resulted in the creation of executive committees or new roles to oversee climate risk management activities at a handful of banks…but bar a few exceptions, there is still significant room for improvement in implementation.
  2. Banks are increasingly performing climate change stress testing and scenario analysis…but scope tends to be limited.
  3. The majority of the developed markets banks in the scope of the project have published dedicated Task Force on Climate-related Financial Disclosures (TCFD) reports or included TCFD-aligned reporting in their annual or sustainability reporting…but these are usually missing sufficient details on climate-related implications for strategy and financial planning, as well as on metrics and targets used to assess and manage relevant climate-related issues.
  4. Banks in emerging markets significantly lag their peers in developed economies. They are aware of the risks they face from climate change…but most have not yet set up appropriate governance frameworks or developed robust strategies, which leads to their climate-related disclosures being very limited.

Risk warnings

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

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