Large US Bank Meets Strategic Climate and Investment Goals via Broad, Single-Provider Solution
Natural disasters are becoming more frequent, resulting in more significant catastrophes. The ongoing effects mean banks in the U.S. have no choice but to pay closer attention to climate issues. From debt and equity capital markets to physical losses from default and the entire risk spectrum, a comprehensive sustainability framework is increasingly critical.
Conversations with this large commercial bank began within their Capital Markets and Wealth Management teams around sustainability-related issuances and investments. In particular, their Risk Management team wanted to look at the impact of different scenarios for transition pathways and risks on the bank’s corporate clients involved in high carbon-emitting sectors to understand how this would affect the creditworthiness of obligors. This team also needed transparency into the model output, as well as documentation to back our proposed approach. However, as additional groups from the bank were brought into the conversation, it became clear they would benefit from incorporating a broad sustainability framework together versus a piecemeal approach. A multi-vendor approach could have solved their needs, but they would then face the challenge of integrating different data sources, products, and solutions.
A Regional Bank Embraces ESG Reporting
Banks in the U.S. are paying more attention to environmental, social and governance (ESG) issues given demand from investors, boards of directors and other stakeholders for more transparency.1 That said, many struggle to accurately collect and report necessary data or effectively tell their story on these issues.
The head of IR at this regional bank saw the growing need to have a climate strategy and disclose the company’s current carbon footprint and plans for improvement over time. He felt this would help the bank get ahead of the curve relative to its peer group, plus address new requirements from the board of directors and credit rating agencies.
For most business activities, the largest proportion of the carbon footprint is concealed in supply chains or in the product use and disposal phases. Given this, the IR team wanted to look at the carbon footprint of the bank’s business partners, as well as its own operations and use this as a baseline for setting reduction targets.
A Bank Looks to Take a Lead Position on Climate Action
As climate change continues to gain attention throughout the world, it has become increasingly important that banks develop a deeper understanding of climate-related issues that could affect their businesses and those they finance. By effectively identifying and managing these issues, banks can help mitigate the risks, while also seizing the opportunities presented by a transition to a lower-carbon economy.
The enterprise risk management team at this U.S.-based commercial bank is responsible for identifying any risk that could negatively affect the business. While this had traditionally included credit and operational risks, environmental, social and governance (ESG) risks also started to become a concern. The team had been working with third party consultants to better understand how to think about climate risk in particular, and now wanted to look at hard data to assess the bank’s carbon footprint and potential exposure in its loan portfolio.
A Global Bank Assesses Its Resilience to Climate Risks
Climate change induced by greenhouse gas (GHG) emissions poses a serious threat to the planet. As a result, it has become one of the main topics of discussion among governments and financial regulators due to its potential to slow economic growth, reduce employment and undermine the stability of financial markets.[1] Central banks and regulators across the world are taking steps to ensure that banks are prepared for any shocks to the financial system by having significant financial institutions stress test their counterparty exposures and portfolios under a range of different climate scenarios.
Members of the climate team at this large global bank are responsible for measuring and managing the bank’s exposure to environmental threats. This includes undertaking stress tests of the bank’s loan portfolios in order to meet regulatory requirements being driven by the European Central Bank (ECB) and the Monetary Authority of Singapore (MAS). These exercises require access to robust climate data and analytics to effectively model transition paths to net zero for the bank’s corporate clients.
A Bank Evaluates the Impact of Physical Climate Risk to its Mortgages
Real estate investments are uniquely vulnerable to climate change. The impacts of rising seas and storms alone could cost coastal cities $1tr U.S. each year by 2050, according to the Global Commission on Adaptation.1 Financial institutions are starting to recognize climate risk as an important issue that needs to be considered in their investment and lending strategies. There are two types of climate risk:
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