Financial institutions in emerging economies show low adoption of comprehensive climate risk management and disclosures. Support by international partners and the regulatory framework will be essential to helping the financial sector to recognise and manage financial risks associated with climate change, a survey by the European Bank for Reconstruction and Development (EBRD) among partner financial institutions (PFIs) shows.
Many financial regulators today offer recommendations and guidance on the disclosure of climate-related financial risks to help integrate climate impacts into investor portfolio management. Credit rating agencies are developing new ways to anticipate how climate-related risks could impact businesses and financial institutions.
Financial institutions find themselves under an increasing pressure by investors, regulators, consumers and the broader group of stakeholders to identify, assess and mitigate the possible risks from climate change and policy and market transition. Yet the financial impact of climate change on financial institutions is not always clear and, for many organisations, identifying the issues, assessing potential impacts and ensuring the material risks are properly managed and mitigated can be challenging.
The survey report assesses whether financial institutions across the EBRD regions are adequately prepared for the challenges above, namely to manage transition and physical risks associated with their financing. Of the 215 PFIs that received the survey in the first quarter of 2021, the response rate was 62% in 34 of the 38 economies where the EBRD works.
The report shows that financial institutions in EBRD regions have a low level of awareness of climate risk management and do not yet tap sufficiently into knowledge offered by international best practice initiatives, making improvements largely in response to changes in regulatory regimes. It also showed that PFIs in EBRD regions look to the EBRD for support primarily through tools and resources, practical knowledge and capacity building.
Among highlights of the survey:
- Financial institutions have limited awareness of risks associated with climate change. Only 43% of respondents consider the impact of their portfolio on climate change as a potential source of risk.
- An overwhelming majority of respondents who consider the climate impact of their portfolio as a risk also manage such risk through exclusions.
- Responses from the surveyed institutions point to lack of clarity on what skills and resources are required for implementation of risk management and disclosure processes. As an example, only 4 in 10 respondents are involving Risk function in leading the implementation of climate risk management.
- The introduction of climate-related requirements or supervisory expectations by governments, policymakers or regulators is by far the most important external factor motivating financial institutions to strengthen their climate risk management, but lack of specific guidance, relevant data, and standardisation is considered a major obstacle.
To support high-quality climate risk management across the sector, the survey shows that there is a need to build up PFIs’ capacity to improve climate risks and opportunities management across their portfolio; engage with regulators on promoting transparency and disclosures; improve access within the sector to emerging global best practice; and provide targeted institutional capacity-building support.
Climate risks and disclosures are an important component of the EBRD’s Green Economy Transition Strategy 2021-2025 strategy. The EBRD follows the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and last year published its first stand-alone TCFD report on the steps it is taking. It is currently carrying out a pilot to examine the impact and changes needed to fully implement the TCFD’s growing disclosure requirements.