Financial institutions will need to integrate climate-related and environmental risks within their overall business model and strategy, which implies re-assessing their risk appetite, governance, risk management and disclosure functions to take into account these new risks across their entire business.
At an early stage, the scarcity of climate-related data and its complex relationships with the traditional risk drivers can represent a challenge for the institutions that might need support from quantitative analysts and climate-related and environmental experts. New KPIs and key risk indicators (KRIs), such as climate Value-at-Risk (VaR) and adjusted probability of default (PD) should be embedded in internal reporting frameworks to allow senior management to take the right courses of action.
What it means for banks?
The European Central Bank (ECB) will require progress reports on the integration of such risks, based on upcoming guidelines. Specifically, these reports will have to show how financial institutions are living up to the ECB’s expectations on climate-related and environmental risks by integrating them at all stages of their risk management framework with, among other factors, sufficient involvement of the management board.
The ECB and the European Banking Authority (EBA) are invested in pushing financial institutions to actively manage climate-related and environmental risks with scenario analysis and stress tests at the centre of the discussion.
What it means for insurance companies?
Considering that, to a certain extent, current underwriting and pricing strategies might already take into account the expected impact of climate change, and that the guidelines issued by the European Insurance and Occupational Pensions Authority (EIOPA) on Own Risk and Solvency Assessment (ORSA) require undertakings to have a forward looking assessment of solvency needs (also reflecting undertaking’s risk profile), it seems however relatively clear that the ORSA’s will have to further assess climate change risks using scenario analysis, with a longer-term perspective when performing the related quantitative analysis. While several consultations are still open, EIOPA expects undertakings to integrate climate change risks in their system of governance, risk-management system and ORSA, in line with Solvency II legislation, guidelines and the Opinion on Sustainability within Solvency II.
What are your objectives?
Understand where your institution stands compared to best practices for climate-related and environmental risk management and their potential impacts on your business model and strategy
Embed climate-related and environmental criteria in the risk management framework (operational, credit, liquidity, and market risk)
Manage portfolios’ exposure to climate-related and environmental risks
Perform climate change scenario analysis and stress testing
Develop the appropriate KPIs and KRIs
Assess the impact on climate-related and environmental risks on your capital adequacy
PwC can help you perform an initial gap analysis across the principles articulated by the ECB and best market practices, define a target state and road map for implementation (taking into account the institution’s strategy and expected changes to the business and operating environment), identify material climate and environmental risks for your business model and strategy, support the risk management function in their integration process of climate-related and environmental risks into the risk management framework of your organisation (including modelling and stress testing).
More about climate-related and environmental risks
PwC’s Climate Excellence tool
Our Climate Excellence tool will prove valuable in helping you calculate the consequences of specific climate transition risks such as changing prices, demand, technological advances or regulatory intervention. The tool allows you to holistically analyse the financial portfolios of up to 40,000 listed securities for climate risks.
More about PwC’s Climate Excellence tool