Banks are struggling to integrate climate change into their risk management frameworks due to a significant lack of reliable data, according to new research published Tuesday by Risk Benchmarking. The study, which surveyed 43 banks, found that a “dearth of reliable data” remains the biggest obstacle to effectively assessing and managing climate-related financial risks.
The findings come as regulators globally are increasing pressure on financial institutions to better understand and disclose their exposure to climate risk. A recent paper from the International Monetary Fund outlined good practices for supervisors, emphasizing the need to integrate climate-related risk into corporate governance and internal controls. However, the Risk Benchmarking report suggests that practical implementation is hampered by data limitations.
While 81% of banks have established dedicated teams to address climate risk, the size and scope of these teams vary considerably, according to a separate report from Risk.net. Ownership of climate risk management is also shared across multiple departments, including risk, sustainability, and business units, creating a fragmented organizational picture.
The lack of data isn’t limited to assessing the physical risks of climate change, such as extreme weather events. Banks also face challenges in quantifying the financial impact of the transition to a low-carbon economy. According to Ferma research, approximately 50% of risk managers believe that some key business risks are becoming uninsurable due to climate change, highlighting the growing uncertainty in the insurance market.
Client engagement and data pooling among lenders are seen as potential solutions to address these data gaps, but the Risk Benchmarking research indicates that widespread adoption of these approaches is unlikely in the near future. The annual climate protection gap currently stands at $200 billion globally and continues to widen, further complicating efforts to mitigate climate-related financial risks.
The increasing responsibility for managing climate risk is falling to Chief Risk Officers (CROs), but a clear organizational structure for handling these risks remains elusive, according to the Risk.net study. This lack of clarity, combined with data deficiencies, presents a significant challenge for banks as they navigate the evolving landscape of climate risk management.
