Financial institutions are building out their climate risk programs in response to stakeholder expectations and regulatory initiatives. To offer insight into these demands, KPMG has created this series to explore how banking organizations are approaching these programs, including specific considerations for global systemically important banks (GSIBs), superregional organizations, and regional organizations.
In this initial article, we focus on how climate risk programs are structured today across a variety of banking organizations and their path to maturity in order to meet stakeholder expectations and anticipated regulatory disclosure requirements in the United States. In future posts, we will examine key program components, including peer benchmarking, data assessments, technology considerations, risk ID and scenario analysis, roadmap design, and external reporting from different organizational perspectives (i.e., GSIBs, superregional, and regional).
U.S. regulators haven’t yet issued mandatory climate risk disclosure requirements. However, we expect the U.S. will soon join regulators in other countries and adopt the regulations and disclosure requirements recommended by the Task Force on Climate-Related Disclosures (TCFD). To prepare for this adoption, financial firms need to begin assessing their exposure to climate-related risk and how these risks will ultimately be integrated into their enterprise risk management program through the development of a climate risk program.
Today, many climate risk programs are in their infancy, with small groups of individuals responsible for analyzing, measuring, and reporting the organization’s climate-related risks. This reporting is typically seen in company annual environmental, social, and governance (ESG) and corporate social responsibility (CSR) reports. In these reports, most organizations reveal that they are behind the curve and highlight the need for future reporting to apply additional rigor in the assessment of exposure to climate-related risks, including wholesale and retail lending portfolios with a focus on geographic hotspots with frequency of climate-related events.
With elevated awareness across the globe and the threat of climate change accelerating with some of the most extreme weather events in our history occurring within the last five years, organizations can no longer delay enhancing their capabilities to assess and mitigate the financial impacts of climate-related risk across all lines of business.
To begin, these financial institutions may want to focus on building capacity and competency—through hiring or contracting—to further develop a team of climate professionals to support the creation of a climate risk program. As this program develops, firms will likely be required to evolve beyond their small group reviewing and assessing climate-related risks to where climate risk is integrated into in all risk stripes (i.e., credit, reputational, operational, market, etc.) across the organization.
As a starting point, organizations should consider performing risk identification assessments to determine where the most material risks are within the business. After this, organizations can begin to develop strategies and scenarios to understand the impacts of climate risk on its business from both a qualitative and quantitative perspective. These initial steps will allow organizations to be better positioned to keep pace with the market in assessing climate-related risks and will serve as the building blocks of a climate risk program in anticipation of regulatory oversight.