Climate-related risks at top Eurozone bank

How is a top-five Eurozone bank, with global operations, managing the challenges presented by public disclosure of its climate-related business and financial risks? By engaging the world-class climate risk experts at ERM.

Given the potential for climate change to destabilize the global economy, the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) was established to enhance information to investors, lenders and insurers so that the risk, and opportunity, is recognized, assessed and priced in. Demand for public disclosure around TCFD and other initiatives has been rapidly expanding, and the bank recognized the need to meet emerging stakeholder expectations.

To meet anticipated pressure from investors, regulators and other stakeholders, the bank sought to enhance its capacity to respond to the TCFD recommendations, including its internal capability on climate change science, policy and economics, and the use of scenario-based, climate-related financial risk and opportunity assessment.

ERM worked as a team with the bank’s internal stakeholders to help build understanding and engagement, particularly among senior management, and then to develop a more detailed implementation plan and pilot scenario analysis on a particular exposure within the bank’s balance sheet. ERM was able to deploy our deep experience gained over the past decade in climate-related scenario analysis to this engagement, building on our role assisting the TCFD in drafting the technical supplement on scenario analysis (the “how to” guidance released with the TCFD recommendations).

ERM deployed two of our proprietary tools, which differentiated our approach with the bank. First, we used ERM’s “TCFD Bank Disclosure Benchmarking Tool” to benchmark the bank against its peers, identify gaps and recommend key actions to implement and disclose over the next few years. We also applied our “Climate Financial Driver Analysis” methodology to a key sector of the client’s European banking portfolio as part of scenario analyses to assess forward-looking levels of climate-related risk and opportunity related to the bank’s exposures.

Our flexible approach helped the client’s team complete the project under tight deadlines, including gaining approval from a Board-level committee. Our collaborative methodology was key to successful delivery and the client team gaining the Board-level mandate to establish a wider program to address the recommendations of the TCFD. ERM continues to support the client with the implementation of this program, including further capacity building and scenario-based analysis work.