February 04, 2022
Benchmarking study of over 70 financial institutions identifies potential revenue enhancement and increased regulatory compliance as drivers of progress on climate risk strategy.
A new benchmarking study found that climate change is placing increasing demands on major financial institutions worldwide to establish and execute on climate risk mitigation strategies. The study — led by consulting firm Sia Partners and law firm Cadwalader, Wickersham & Taft LLP — involved dozens of interviews and a quantitative survey of over 70 global financial institutions. Survey submissions and interviews for the full market research study ran through January 2022.
The study involved foreign banks, G-SIBs, investment managers, U.S. regional banks and European banks. Preparedness varied based on institution size and geography, but, notably, approximately 90 percent of participants have at least started the process of a climate risk framework. Execution could be a challenge, however, as less than 20 percent of participating firms had fully engaged business lines to perform risk assessments and, as a result, “still do not have a clear understanding of how climate change will impact them,” according to the study analysis.
“It is promising and significant that so many financial institutions worldwide are focused on the implications of climate change very seriously,” said Bradley Ziff, an Operating Principal at Sia Partners who directed the project for the two firms. “There is considerable work to be completed, and study participants noted that the industry is well past the point of kicking the can down the road. Leaders in this space are emerging – namely, the larger banks and investors and those who have been investing for several years by putting in place real climate risk mitigation strategies supported by operational and data efforts to meet both market and regulatory objectives.”
Even though coalition-building efforts including the globally recognized efforts by the Task Force on Climate-Related Financial Disclosures (TCFD), with its more than 2,500 signatories, have made an impact, an increasingly important driver is the rapidly expanding regulatory oversight globally. Increased pressure from governmental entities is already compelling financial institutions to further action, the study found. After all, just 21% of the G-SIBs in the study said that they have implemented all the recommendations and supplementary guidance published by the TCFD, although there were meaningful geographic differences among that group.
“Banks and financial institutions must look at climate risk mitigation not simply as a regulatory requirement but also as a significant opportunity for increasing market presence and as a client service,” said Scott Cammarn, a senior counsel in Cadwalader’s Financial Services group. “The financial institutions that are most advanced in their thinking about climate risk are applying what they learn in dealing with their internal and proprietary challenges as lessons that can be passed on to clients and potentially as opportunities to increase revenue by helping clients with the management of clients' regulatory, business and stakeholder risks.”
Study participants emphasized the essential need for global standardization across regulators and the industry for disclosure requirements, among other items. The plethora of differing approaches has made adherence to better practices a major challenge for almost all study participants. This was a highlighted concern among study participants with global operations, where conflicting regulatory approaches created meaningful issues in building out their programs.
Another key finding from the study is the criticality of enhanced data. The study found that participants “who have succeeded to date are those who have begun efforts to attain quality data to drive many other areas of their programs.” Participants also noted that more required public disclosure will, in turn, drive more data generation and analysis.
John Gustav, Partner and Head of U.S. Financial Services at Sia Partners, emphasized that enhanced data will likely be attained through improvements in governance.
“Effective governance models will drive implementation and more disclosures, and thus better data for the industry to measure and analyze,” he said.
The Sia Partners-Cadwalader study uncovered a number of other significant findings:
“The opportunities are not lost on financial institutions,“ said Brendan Moriarty, a co-author from Sia Partners. “There are serious players with innovative approaches, moving forward with their offensive position, rather than strategizing on how to mitigate physical and transition risks.”
Sia Partners’ Ziff concluded: “The study suggests that firms appreciate that the climate clock is ticking fast and that, for a host of good reasons, they will need to have both thoughtful and balanced efforts that achieve meaningful risk mitigation reductions. Policymakers are now increasingly challenged to create approaches that map out targeted reductions in Co2 emissions while recognizing the economic realities of achieving those targets among the richest and poorest nations. Study participants realize that the next several years will be critical in initiating those mitigation programs and working with the official sector in developing practical solutions that the industry can embrace.”