Credit risk

Integrating Climate Risk into Bank Credit Risk Management: Practical Considerations

According to a recent CDP report, while many banks have identified the effects of climate change on their operations, most have yet to measure the impact on their funding portfolios. This means that most banks are likely underestimating their exposure to climate-related risks. At the same time, banks also have huge opportunities to facilitate the transition to carbon-neutral activities, such as clean energy generation and storage and carbon capture technologies. Integrating climate risk metrics into credit risk management could be a huge undertaking for most banks, but it’s a necessary step towards a carbon-neutral future.

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

KEY MESSAGES

  • The banking sector plays a leading role in the fight against climate change. The urgent actions that banks and their customers are taking to achieve their net zero commitments will significantly transform bank lending practices.
  • While many banks have identified the effects of climate change on their operations, most do not grasp the full extent of the impact on their funding portfolios.
  • Since all stages of the credit lifecycle are likely to be affected by climate risk, integrating climate risk metrics into credit risk management could be a huge undertaking for most banks, but it is a necessary step towards a carbon neutral future.
  • As a starting point, banks should reassess their credit business strategies to address climate change issues: the markets, segments and customers they will serve; the products they will offer; and the innovations they will bring to market.