Climate Edition

by | Dec 4, 2023 | Climate Risk, Risk Report | 0 comments

Bad COP, Good COP, Take 28

This weekend is the COP28 (which stands for the 28th meeting of the conference of the parties (COP) to the UN Framework Convention on Climate Change (UNFCCC)). It’s being held in Dubai, ten-thousands of people are flying in from all over the world to participate, and this week began with leaked documents (allegedly) showing the host (United Arab Emirates) planning to pitch oil and gas deals during the meeting.

Irony aside, the main topic is, as always, how we limit global warming by 2050 to 1.5 degrees Celsius (roughly 2.7 degrees Fahrenheit) compared to pre-industrial levels. Beyond that, the damaging effects of global warming will become irreversible.

Staying within this target, also known as the Paris Agreement, requires that we cut global CO2 emissions in half by 2030. And how is that working out for us? Well, at the moment emissions are going up with about 1% per year, and 2023 is in line to become another hottest year on record.

Also, In Our Backyard

It is not only the rest of the world that feels the heat. The US Government just released its fifth National Climate Assessment, and it is not all unicorns, though there are some extreme weather-related rainbows.

The assessment underlines the risk areas of water supply, food security, infrastructure, health, ecosystems, economy, and livelihoods. These are, of course, interconnected and foundational. Without one there are none of the others—except for our particular species.

On the brighter side, the assessment points out that we can still turn this around and that would have a lot of health, social, and economic benefits.

Climate Risk Is Integrated Risk

The first step to any change is awareness.

That is also what Team Regulator is going for in their Principles for Climate-Related Financial Risk Management for Large Financial Institutions that were finalized late October.

Overall, the principles state that financial institutions are to be aware of climate-related financial risk in their governance and strategic planning as with any other financial risk.

One raised eyebrow to the specific mention of low- and middle-income segments as well as underserved communities. Even though the isolated, short-term solution to climate risk could be to not lend or lend less to these, the principles explicitly state that rules for fair lending and fair housing are still very much to be followed.

  • The principles specify that financial institutions are to identify, measure, monitor, and control climate-related financial risk.
  • The data, measurement, and reporting shall be timely, accurate, consistent, complete, and relevant.
  • And it includes forward-looking assessment of the potential impact on the financial institution of changes in the economy, financial system, and distribution of physical hazards AKA scenario analysis.
  • This goes across all risk types, credit, liquidity, interest rate, volatility, operational, and legal. Climate risk is integrated risk.

While the principles are made for financial institutions with $100bn or more in assets because of their systemic role and responsibility, they are obviously relevant to any size bank.

Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.