Source Oliver Wyman

Thanks to the efforts of a coalition of 16 global banks convened by the UN Environment Finance Initiative, the banking industry has made progress on the arduous task of assessing the risks and opportunities associated with climate change. Evaluating climate-related exposures in the banks’ corporate loan portfolios is necessary if they are to assess the creditworthiness of corporate borrowers and their strategies moving into what could be a period of unprecedented risk from the earth’s rising temperatures or from a rapid transition to a low-carbon economy.

The consortium aims to respond to the recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD). These recommendations provide a high-level guidance to report on climate impacts in mainstream financial filings, but left it to the various industries to develop their own approaches. In line with the mission of the Global Climate Action Summit, the goal of the assessment and disclosure of climate-related risks and opportunities is to encourage a better allocation of capital that will facilitate the transition to a more sustainable, low-carbon economy.

Supported by consulting firms Oliver Wyman and Mercer, the consortium of banks developed, tested, and published a methodology to assess the risks and opportunities associated with the transition to a low-carbon economy in the banks’ corporate loan portfolios. While corporate loan portfolios are short term compared to the time horizon of a low-carbon transition, providing banks with flexibility to adjust such portfolios over time, banks should not wait to assess the potential impacts and opportunities of climate change. Changing the exposures and risk profile of a corporate loan portfolio takes time: assessing risks and growth prospects, developing a coherent strategy, and building capabilities and relationships to affect the profile of the client base require advanced action. Additionally, understanding climate risks and opportunities will allow banks to engage with their customers to help them manage the transition to a low-carbon future. It is also through corporate portfolios and their lending activities that banks can exercise the most influence in catalyzing the low-carbon transition.

Adopting the TCFD recommendations is voluntary, but should lead to better risk management and facilitate the transformation to a low-carbon economy. The financial institutions leading this work and piloting the methodology are ANZ, Barclays, BBVA, BNP Paribas, Bradesco, Citi, DNB, Itaú Unibanco, National Australia Bank, Rabobank, Royal Bank of Canada, Santander, Societe Generale, Standard Chartered, TD Bank Group and UBS. Also participating in the studies were scientists from the International Institute for Applied Systems Analysis and the Potsdam Institute for Climate Impact Research.

For more information on the new banking methodology and other climate-related work being done by Oliver Wyman, please visit our climate risk hub, Confronting Climate Risk.

Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation.

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