Embedding climate risk into banks’ credit risk management

According to a recent CDP report, while many banks have identified the effects of climate change on their operations, most have not yet measured the impact on their financing portfolios. This means most banks are likely underestimating their exposure to climate-related risks. At the same time, there are also huge opportunities for banks in facilitating the transition to carbon-neutral activities, such as clean energy production and storage, and carbon-capture technologies. Integrating climate risk metrics into credit risk management could be an enormous undertaking for most banks, but it is a necessary step toward a carbon-neutral future.

This report offers a roadmap for how banks can embed climate risk into the different stages of the credit lifecycle— including strategy, underwriting, portfolio management, and reporting and disclosure. It also sheds light on the tools and processes that are becoming increasingly central to these efforts. The steps outlined here can also provide a solid foundation for other enterprisewide climate change strategies and commitments, including reporting progress to regulators, investors, and other stakeholders.

KEY MESSAGES

• The banking industry is playing a leading role in addressing climate change. The urgent actions banks and their clients take to reach their net-zero commitments will materially transform banks’ lending practices.
• While many banks have identified the effects of climate change on their operations, most are not capturing the full extent of the impact on their financing portfolios.
• Since all stages of the credit lifecycle will likely be impacted by climate risk, integrating climate risk metrics into credit risk management could be an enormous undertaking for most banks, but it is a necessary step toward a carbon-neutral future.
• As a starting point, banks should reassess their credit business strategies to address climate change issues: the markets, segments, and clients they will serve; the products they will offer; and the innovations they will bring to the market.