How Banks Can Manage Climate Risks and Opportunities

Chris McClure

Gregg Anderson

By Chris McClure and Gregg Anderson

The global banking industry has an opportunity to play a significant role in addressing the challenges climate change presents. Banks can take proactive steps to manage climate risks and opportunities by anticipating regulatory requirements, measuring emissions, understanding the risks in their loan and investment portfolios, and playing a role in the transition to a sustainable future – and many banks are already leading the way.

Anticipating regulatory requirements

Regulatory requirements related to climate change are rapidly evolving, and banks need to stay up to date with these changes to effectively manage climate risks and opportunities. Many jurisdictions, including the European Union, Singapore, Canada, Japan, South Africa, the United Kingdom, and New Zealand have mandatory climate risk disclosures effective now or by 2025. Additional jurisdictions including the United States also have proposed rules. Banks can follow the lead of the central banks and the Basel Committee’s principles for the effective management and supervision of climate-related financial risks.

The Securities and Exchange Commission also has introduced reporting requirements for ESG funds, which include disclosing information on the environmental and social impact of their investments. This guidance puts pressure on banks to improve their ESG reporting and confirm that their investments align with their sustainability commitments.

With increased regulatory scrutiny and accusations of greenwashing, banks should make sure that their climate disclosures are transparent, accurate, and aligned with industry standards. Additionally, they should disclose information on their exposure to climate-related risks and the steps they are taking to mitigate those risks.

By anticipating regulatory requirements, staying informed of developments, and participating in industry initiatives that promote sustainable finance, banks can be better prepared to meet regulatory requirements, and they can position themselves as leaders in sustainable finance.

Measuring emissions

Measuring greenhouse gas (GHG) emissions is another critical action banks can take to manage climate risks and opportunities. Banks should analyze emissions on two fronts: their own emissions and their financed emissions.

As responsible organizations, banks should measure emissions from their own operations, such as energy use and business travel. Banks also should measure and report on the greenhouse gas emissions associated with the companies and projects they finance. It’s important for banks to plan for a learning curve in understanding climate risks, and they should consider conducting a materiality assessment and designing processes for gathering historical and current climate data.

Banks can account for emissions using a variety of methodologies, such as the Greenhouse Gas Protocol and the Global GHG Accounting and Reporting Standard for the Financial Industry. Once emissions are counted, banks might set targets to reduce emissions by using renewable energy sources or financing low-carbon projects.

Understanding risks in loan and investment portfolios

Managing risk extends from emissions to portfolios. Banks should incorporate climate risk into their underwriting and portfolio analyses. For example, increased weather events can affect real estate values and the probability of loan default. Climate-related risks can include physical risks, such as damage to infrastructure from extreme weather events, and transition risks, such as regulatory, legal, technological, reputational, and market risks.

Understanding that climate-related risks typically have a longer time horizon, banks can use scenario analysis to assess the potential impact of different climate scenarios on their loan and investment portfolios. In addition to scenario analysis, banks can engage with companies and borrowers to holistically understand their portfolios, including asking for disclosures on climate-related risks and opportunities, conducting due diligence on new loans and investments, or engaging with companies to encourage them to adopt sustainable practices.

Playing a role in the transition to a sustainable future

Banks can play a significant role in the transition to a sustainable future by financing low-carbon projects, promoting sustainable products, and considering their own environmental footprint.

Supporting and financing low-carbon projects by providing financing for renewable energy projects, such as wind and solar power, is one way banks are already working toward sustainability. In addition to financing, banks can provide expertise on structuring and financing renewable energy projects, which can help accelerate the transition to a low-carbon economy.

Many banks promote sustainable products. Governments are introducing incentives for companies to participate in the transition to a lower carbon economy, and banks can support these efforts by offering green bonds or sustainability-linked building loans. These products are designed to incentivize companies to adopt sustainable practices by offering favorable terms for meeting sustainability targets. Recent examples include credits and deductions under the United States’ Inflation and Reduction Act of 2022 and initiatives in the European Commission’s Green Deal Industrial Plan.

As potential leaders in the transition to a sustainable future, banks can set a good example by considering the impact of climate change on their own operations and taking steps to reduce their environmental footprint. Such steps include reducing their energy consumption, adopting sustainable procurement practices, and promoting sustainable travel and commuting options for their employees.

Managing the risks and opportunities of climate change

As regulatory and industry trends continue to evolve, banks can take important steps now to effectively manage these risks and seize opportunities. Ultimately, taking proactive, intentional action can benefit the environment and the long-term sustainability of the banking industry itself.

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To learn more about navigating your ESG journey, get the latest insights from Crowe ESG specialists.

Chris McClure, ESG Services Leader

Crowe

+1 312 606 7123

chris.mcclure@crowe.com

Gregg Anderson, Managing Director, Financial Services Consulting

Crowe

+1 630 586 5142

gregg.anderson@crowe.com