Climate change offers more upside than risk for the world finance sector, at least over the next five years, according to a new report.
The second annual Global Association of Risk Professionals (GARP) survey of 71 major financial institutions found that about 35 per cent of respondents expected to reap strategic benefits from climate change over the next five years. Conversely, just 15 per cent of those surveyed expected climate risks to negatively impact their strategies over the same period.
However, over longer time-frames the majority of respondents expected both climate risks and opportunities to flow into core strategic decisions. About 60 per cent of financial firms said climate change would have upside and downside implications between five and 15 years from now. Beyond 15 years, though, climate risks slightly outweigh opportunities for financial businesses, the GARP ‘Global Benchmarking Survey’ found.
The 15-year mark also looms as an important milestone for the resilience of financial institutions’ current strategies in the face of climate change.
“While over 70% of firms believe their strategy is resilient to climate change over the next five years, only 10% of firms believe it is resilient beyond 15 years,” the report says.
Almost 80 per cent of companies have already introduced new products that incorporate climate risk, the survey found, while just over 60 per cent have adapted existing products for the same reason.
“In preparation for changing risks and opportunities, nearly two thirds of firms have either altered existing products (e.g, converting funds into ESG funds, assessing products against green criteria, ceasing to finance coal-fired power stations) or created new products – including green or sustainability bonds, sustainability-linked loans, ESG funds and crop insurance,” the GARP study says. “Many firms have increased financing of renewable energy and green buildings, while a few have introduced green deposits and other products positioned to facilitate the transition to a low-carbon economy.”
Close to 80 per cent of respondents also plan to either create new products or tweak current offerings to reflect climate change risks and opportunities.
Despite heightened awareness of the issue only 4 per cent of those surveyed said climate change was “priced correctly” with most reporting the risk was either ignored or only partly factored into product prices.
“Participants noted the challenges of pricing climate risk: namely, the complexity of climate change and forecasting its impacts, the lack of robust and reliable data on climate risk and the difficulty of combining the short-term focus of pricing models with the long-term nature of climate risk,” the GARP report says.
The survey found a number of other barriers to incorporating climate risk in financial institution strategic plans, most notably the lack of reliable models and regulatory uncertainty.
Jo Paisley, GARP co-president, said the survey confirms: “Banks and other financial institutions are recognizing the potential impact of climate change on their balance sheets and operations, which will lead to both risks and opportunities.
“Firms are evolving their climate risk management capabilities as they are concerned about the long-term resilience of their business strategies to climate change.”
The GARP study tapped into 71 global financial institutions including banks, asset managers, insurers, and other firms with a total market capitalisation of US$3.8 trillion.