Bank regulators in the EU, UK and Canada are concerned about systemic exposure to climate risk, and have laid out an aggressive timeline for bank climate disclosures, with every bank reporting their 2023 sustainability data – energy, emissions, water and waste – in the near future. In the scramble to report, it is easy to lose sight of the key risks at hand.
In a recent speech, Michael Hsu, the Acting Comptroller of the U.S. Currency laid out five board-level questions for every bank. Bank boards play a pivotal role, directing senior management, asking the tough questions and forcing clear disclosures. Here’s a synopsis of Hsu’s speech as a guide (read the full speech here).
#1 What is our overall exposure to climate change?
To answer this question bank senior managers must develop a framework, a risk taxonomy, metrics, data, scenarios, and a strong understanding of the first- and second-order impacts of climate change on the bank’s portfolio.
There is no single number that defines the risk, instead the bank’s risk profile is what should be evaluated. Hsu argues for a top-down and bottom-up approach. The latter requires building out a portfolio database and then running scenario after scenario to explore risk exposures.
#2 Which counterparties, sectors or locales warrant heightened attention and focus?
With pressing timelines, the first order of business is to identify the largest exposures. Again, a data-driven exercise.
#3 What if there was a carbon tax?
Hsu acknowledges that a carbon tax is unlikely, but running scenarios with various carbon prices is an incredibly useful way to organize costs, concentrations, correlations of risk and more. Use the carbon tax as an analytical tool.
#4 “How vulnerable are our data centers and other critical services to extreme weather?”No data, no banking services. While banks have been doing disaster recovery planning for years, and may be using cloud services, climate risk can be concentrated in specific locales. Check data center and critical service locations against fine-grained climate risk scenarios.
#5 “How can we seize opportunities from climate change?”As Hsu states, “Just as strong credit risk management capabilities can provide the assurance and confidence needed for a bank to make risky credit decisions prudently, strong climate risk management capabilities can enable the same prudent risk taking….The better a car’s brakes, the faster you can safely drive it.” GLYNT.AI is the market leader for accurate, audit-ready sustainability data. Use our services with bank portfolios to build verified baselines and integrated financial-sustainability scenario analyses.
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