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Great Expectations_Titel
Financial services

Great Expectations: Climate Related and Environmental Risks

Climate-related and environmental (CR-E) risks are considered the greatest risks in the current global risk landscape. Implications of climate change are catastrophic for the planet and consequently, for our economies and societies (World Economic Forum’s Global Risk Landscape 2020). The management of CR-E risks in the financial industry, with its dual role of an accelerator and multiplicator in the economy, serves an essential role to the overarching aim of sustainability.

The objective of this study is to provide a snapshot of the as-is maturity level within financial institutions with regards to the thirteen expectations delineated in the “Guide on climate-related and environmental risks” (CR-E risks) by the ECB. For this purpose, a questionnaire was developed with more than 30 questions, including qualitative statements, split into three main categories: (1) Strategy, (2) Governance & Risk, and (3) Data & Reporting. Participants operate as universal banks, direct banks, and cooperative banks as well as special financial service providers. The participants are located across Austria, Germany, the Netherlands and Switzerland.

Considering that the financial service sector acts as a multiplier in the economy and that the combined balance sheet size of the participating financial institutions is more than EUR 5 trillion, the impact of the participants in the economy is deemed as broad.

Key findings of this study are:

  • Maturity of the approach towards the inclusion of sustainability differs between the four countries. The Netherlands are ahead in this regard. ESG-related topics are already deep in the strategy, governance and subsequently in the whole organizational structure. Global or at least EU-wide standards and regulations could foster the efforts for other countries as well.
  • More than half of the institutions see their business models at least moderately and 38% extremely affected by CR-E risks. Simultaneously, institutions recognize that by positioning themselves as pioneers internally and externally they can send a powerful signal to the market participants and drive an economy-wide realignment on more than just core industries.
  • Overall governance structures for CR-E risks are heterogenous and not well developed. Only 50% of participants implement measures to manage CR-E risks but the execution of these measures is governed by different bodies in different institutes and is sparely tracked. The sole exception being the inclusion of CR-E risks into the risk culture by 78% of participants. Furthermore, institutions struggle to allocate CR-E risks to one specific risk category. They are seen as a facet to all – credit, market, operational and liquidity – risks.
  • Data and ratings are an essential component of understanding and managing CR-E risks and the lack of both availability and quality represents one of the main pain points of the participants. Efforts to obtain any of both are plagued with high costs and low comparability. Particularly institutions operating globally see reliable and comparable sources of data as necessary to rate products, financing and other offered services along the value chain of financial institutions constantly and transparently.

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Joachim von Puttkamer

Executive Vice President, Global Head of Banking Invent