Banks are struggling to translate improved climate data into effective risk management strategies, according to a recent report by Risk Benchmarking released Friday. Although data availability is often cited as the biggest hurdle, the research reveals that even with expanding datasets, institutions face significant challenges in modeling and systems integration.
The study, which surveyed 43 banks, found that many are hampered by difficulties in incorporating climate data into existing risk frameworks. This suggests that simply increasing the volume of climate-related information isn’t enough to drive meaningful change in financial decision-making.
“Data availability is the biggest challenge facing climate risk managers – but improving datasets is not the end of the story,” the Risk Benchmarking report states. The findings align with a recent perspective article published in Frontiers in Climate, which highlights the strengthening link between climate science and decision-making, particularly in the wake of increasingly frequent and severe weather events. That article emphasizes the importance of learning from past extremes and implementing impact-based early warning systems.
The limitations extend beyond technical hurdles. The Risk Benchmarking research points to a need for better alignment between climate risk assessments and core banking functions, such as credit risk modeling. More than a third of banks surveyed do not yet quantify the impact of climate risk on their credit portfolios.
Experts suggest that a lack of standardized methodologies and regulatory clarity also contributes to the problem. Guidance from organizations like Cal-Adapt stresses the importance of a tailored approach to using climate projections, considering the specific decision context and available data. However, the absence of consistent rules can create uncertainty and hinder widespread adoption of climate risk management practices.
The report also notes a varied distribution of responsibility for climate risk within banks. Ownership is often shared among risk, sustainability, and business units, leading to potential fragmentation and a lack of clear accountability. Dedicated climate risk teams vary significantly in size, further complicating efforts to integrate climate considerations into broader financial strategies.
Strategic frameworks, as outlined in a NASA-funded report, should prioritize enhancing impact-related and open-access climate services globally. Continuous improvements in predictive modeling and observational data are also crucial, alongside ensuring climate science remains relevant to decision-makers at all levels.
As of Friday afternoon, no major financial regulators had issued a public response to the Risk Benchmarking findings. The European Centre for Medium-Range Weather Forecasts is scheduled to host a workshop next month on improving the translation of climate data into actionable insights for the financial sector.
