Embedding climate risk and net zero concepts into the fabric of your organization

Financial institutions will play a critical role in helping the world mitigate the impacts of climate change. The starting point for this is understanding, measuring and monitoring climate related risks across your lending and investment portfolios. To do this, organizations need to first educate senior management and then focus on embedding climate risk into the risk management frameworks and train and upskill their teams on this topic.

So how should you approach this? The first order of business should be the Board of Directors. Proposed SEC regulations, which require companies to outline their boards expertise in climate risk making Climate training more important than ever. A top-down approach is fundamental to enabling the comprehension of what climate change will mean to the organization. This is critical not just from a risk perspective, but also in helping your organization to realize new opportunities.

Investors are asking tougher questions and being more vocal through proxy voting, resulting in the need to equip senior management with foundational training across different asset classes, risk types and organizational functions. Next up is the risk function. This team will play an integral role in embedding climate risk into the second line of defence. The core objective here should be upskilling teams to embed and complement existing routines with climate specific key risk indicators, or keep performance indicators rather than creating new or distinct processes and reports.

For example, this could include more scrutiny of physical hazards flood zones in the United States, which indicate a rise in physical risks to the underlying asset. Front office staff are also a priority. These teams are on the front lines with clients. Therefore, require sector specific and asset class level training to understand how to transition. Risk related to policy changes such as a carbon tax may impact revenues or cash flows.

More importantly, relationship managers have the opportunity to strengthen relationships to encourage emissions disclosures while providing climate financing to facilitate economic growth. To that effect, the proposed SCC Climate Risk Disclosure rule will require SEC registrants to disclose scope one, two and three emissions of the material in their filings starting in 2024. In light of this relationship, managers will need to understand their clients’ emissions hotspots and supply chains while continuing to improve knowledge of federal, state and local policy incentives, as well as technological breakthroughs.

Those who do this right will ultimately support their clients in becoming more sustainable through improved supply chains and production efficiencies to provide maximum impact. Training needs to be structured in a modular way to enable building block concepts to translate sustainability into business values and revenue growth beyond the front office and risk functions. You also need to deliver cross-functional training.

Climate risk is usually led by the Chief Risk officer or Head of Climate Risk, but we recommend an integrated, broader approach that involves multiple teams. For example, finance teams should play a key role as you'll want to embed climate risk into your strategic planning efforts and leverage your existing control framework for climate risk disclosures from your growth strategy to launching a new product to engaging with the new vendor.

You'll want to ensure your sustainability commitments are factored into every decision across your organization. This will ensure that your climate risk and net zero ambition are embedded into the fabric of your organization, and your teams are working together to drive real change related to opportunities. The Inflation Reduction Act provides significant incentives for both financial institutions, but also to their clients to initiate and accelerate their decarbonization journey. For example, there is a program that has allocated five plus billion of financial assistance to accelerate the creation of clean technology, to reduce emissions for high emitting sectors, such as direct their capture for oil and gas and green hydrogen, which can be used across the transportation sectors.

While climate risk management in making a net zero commitment is a big undertaking, it ultimately opens up immensely rewarding opportunities for your organization and clients. It helps you future-proof your business and identify opportunities that will improve your bottom line while protecting the planet.