Climate Financial Risk: Session 2 Guides

A second round of guides to help financial firms manage climate-related financial risk has been published on 21 October 2021 by the Climate Financial Risk Forum (CFRF). The 10 guides published build on those published in June 2020 and will help firms respond effectively to climate-related financial risks. The five CFRF working groups are Risk Management, Scenario Analysis, Disclosure, Innovation and Climate Data and Metrics.

The guides will be further explored below.

Risk Management

The outputs for the Risk Management Working Group (RMWG) are designed to help retail banks, corporate banks, insurers and asset managers produce and implement risk appetite statements that integrate climate-related financial risks.  The RMWG published a total of 3 guides: Climate Risk Appetite Statements, Use cases and Climate risk training.

Scenario Analysis

The Scenario Analysis Working Group (SAWG) has produced practical examples on how firms can incorporate sector specific points when developing an effective approach to scenario analysis. The SAWG published a total of 2 guides: Scenario analysis Implementation guide and Data and tools providers spreadsheet. The SAWG will publish an online scenario analysis tool in Q1 2022, which will be designed for use by smaller firms who may not have the experience or resources to attempt independently.

Disclosure

Regarding the disclosure chapter there are Case Studies on climate action from three firms. This document explores climate risk exposure and the opportunities relating to climate change. These case studies demonstrate the deep change that is happening in the financial sector, as significant action with climate financial risk and opportunity is becoming extensive. In short, successful disclosure depends on an efficient climate change management policy.

Moreover, from the Managing Legal risk document, we can understand that to manage their own risk of litigation or liability and to make accurate disclosure based on evolving climate data and reporting capability, financial institutions will need to include clear disclosure as to this context, their own approach and methodology and how data is sourced. They will also need to specify their view as to the limitations of any data and metrics disclosed. This paper suggests some of the areas to consider and how they may be addressed in disclosures.

Innovation

The key message from the innovation document is that the opportunity and upside potential of moving to a net-zero, resilient economy tends to be underappreciated. Where firms need to have capital allocation framework as well as a climate risk management framework, innovation needs to be both actionable and scalable, as per Climate change committee recommendations.

There are three themes running through the cases study videos. Firstly, how to get more real money, real capital into the real economy and make real difference. Secondly, how do we get capital into the difficult parts of the economy so we can have a whole of economy transition. Thirdly, data and measuring the right things to deliver the right outcomes.

Finally, the Climate Data & Metrics Report highlights the ambition of firms as they engage with how to effectively report on climate related risks to which regulated firms and financial markets are subject. It identifies different metrics for different use cases (financial risk to the reporting entity, systemic risk, and impacts on the climate or environment). In its provision of metrics across three categories (basic, advanced, stretch), by implication it also illustrates the range of reporting capabilities that are developing in the market at present, and the possibility for further growth.

For comprehensive guide, please see our newsletter piece here.

How we can assist our client

The goal is to tackle how to comply with the regulatory requirements of the PRA, the FCA and TCFD soon. Now we discuss how SDA can help their clients to identify and manage climate change risks.

Focusing on our clients, we are in a good position to advise clients, and working with them to integrate climate change related risk disclosures into financial reports, by:

• supporting our clients to place climate issues at the centre of their investment decisions, encouraging them to adopt more sustainable practices, bear in mind their risk appetite;
• including climate change related risk stress and scenario modelling in Forward-Looking Assessment of Solvency and Own Risk and Solvency Assessment reports;
• supporting our clients in their first version of Task Force on Climate Change related Financial Disclosures report;
• preparing a tailored climate change related risk register according to the client’s business; and
• assisting our clients on the development and delivery of a climate risk training programme, to capture their climate change risk training needs.

Complying with the regulations requires an assessment of the risks which are being faced, quantifying those risks, disclosing that assessment and considering how the business model may change in the future.  Please get in touch if you need our assistance with this.