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Climate risks: financial institutions can do better

#Foreword

There is now a consensus on the risks that climate change brings to the financial system, and the public actors who regulate finance have been encouraging financial institutions to take them into account for several years. However, as is often the case, the devil is in the detail: how can we properly assess our exposure to the various climate risks? How can we ensure that these assessments lead to concrete changes in the practices of financial institutions? I4CE has long been working to answer these questions and assist regulators.

In this week's newsletter, you can read about our latest study on this topic. We have been looking at what we believe is a very useful request from regulators to financial institutions to use "scenario analysis" to assess and integrate climate risks into their strategies, and to report on them in their mandatory reporting. We make a number of recommendations to move forward with this request, which has not been sufficiently implemented. You can also read olpast I4CE's publications to learn more about climate risk in finance.

But while financial institutions need to better understand climate risk, they also need to actively contribute to an orderly transition to avoid it. And regulators can encourage and help them to do so. How can they do this? By requiring them to publish transition plans and by ensuring their quality and implementation. Let us hope that the European banking package, currently being negotiated in Brussels, will take up this idea.

#I4CE_Report

Scenario analysis of transition risk in finance – Towards strategic integration of deep uncertainty
Scenario analysis can help financial institutions to better understand climate risks, but it is not currently used in a satisfactory manner. In this study, I4CE provides financial institutions and regulators with a checklist of actions to ensure that scenario analysis leads to better strategic integration of transitional climate risks. It should also help to mobilise teams throughout the process and encourage them to review their decision-making processes.

#FlashFromThePast

Blog post: Indeed, banks are able to manage physical climate risks
Heatwaves, such as the one Europe is currently experiencing, are symptoms of climate change already underway and can cause losses for financial institutions. Regulators are pushing financial institutions to take into account so-called "physical climate risks", but banks point to a number of practical difficulties. In this post Romain Hubert explains that financial actors can overcome these obstacles if they put in the resources.

Report: Towards an alternative approach in finance to climate risks: taking uncertainties fully into account
Integrating climate risks into financial management practices is not easy. The characteristics of these risks - long term, non-probabilistic and without history - are indeed difficult to reconcile with standard processes. However, uncertainty cannot be an excuse for inaction. In this study, I4CE proposes ways of integrating these risks, based on the theory of decision making in an uncertain world, which provides alternative approaches and tools for making decisions despite uncertainty.

Project: F inance ClimAct
I4CE is participating, with many partners, in the "Finance ClimAct" project. Financed by the European Commission, its objective is to help the Commission to implement its sustainable finance action plan. It aims to provide to savers, financial institutions and companies with concrete tools to integrate climate issues into their investment decisions, thus aligning financial flows with zero-carbon objectives and strengthening the resilience of the financial system to climate risks.

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