Opportunities while mitigating risk
It is imperative for banks to understand the risks that climate change impacts pose to their balance sheets and overall operations. A well-defined climate change strategy enables the mitigation of, and adaption to,?risks while responding to new opportunities.
?Climate change is a threat multiplier. Rising temperatures and shifting weather patterns are causing an increase in the frequency and intensity of climatic impacts that will affect every aspect of society and the economy.
The physical impacts of climate change will introduce new risks to the banking system, as well as opportunities;?as demand shifts technologies change, economies transition towards low-carbon?inclusive growth paths, and societies adapt to new environments.?
Banks must adapt in this changing context and will need to understand the exposure of their internal operations and portfolios to climate risks. Banks must also?position themselves to take advantage of new opportunities while mitigating physical and transitional risks.
For the banking sector, climate change and climate-related risks can translate into traditional financial risks via economic transmission channels.
By investing in sustainable infrastructure and technologies to reduce carbon emissions, banks can help transition to a low-carbon economy. At the same time, banks need to review their exposure of existing assets and ensure they take the requisite actions. These include reviewing spend on insurance to ensure that banks are adequately covered against climate-related risks such as flooding, storms and wildfires.?
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Scenario analysis allows for the exploration of a range of potential climate change impacts on a bank’s business operations, asset book and financial performance. At Genesis, we are able to combine our deep understanding of financial markets, banking operations and risk management with climate expertise, to model the impact of climate risks, not only on a bank’s financial statements, but on its operating model too.?
While some banks have started to think about the impact of climate change on their business, many have yet to: formulate and define a climate change strategy that is mainstreamed throughout their operations; build capabilities and capacity within their organisation; and create risk management frameworks.
We recommend a three-step process to calculate a bank's carbon footprint, assess the risk and opportunities posed by climate change, and develop a climate strategy and reporting framework that becomes mainstreamed into the organisation. Our approach also fosters a learning culture, allowing you to identify data gaps and continuously improve your strategy over time.?