Financial institutions such as banks and insurance companies are lagging in addressing climate-related risks.

Evmark Business Solutions

The federal financial regulator recently released a report detailing the results of a survey conducted among financial institutions to assess their readiness for upcoming climate-related deadlines. The report found that while most firms have either started or planned work to manage their climate-related risks, there is still a need for more progress to be made in order to meet the guideline implementation dates.

According to the report, financial firms have made progress in incorporating climate considerations into their governance processes, but have not yet quantified the impacts of climate-related risks. This is concerning as climate-related risks are forward-looking and traditional risk management approaches may not adequately identify and account for them. This could result in an inadequate understanding of potential risks and how to respond to them.

The report also highlighted the need for financial institutions to assess the impact of climate risks on their financial and non-financial risks. However, only about half of the survey respondents have assessed less than 20% of their portfolios for climate-related risks, indicating a need for acceleration in this area.

Furthermore, the report noted that financial institutions have not yet factored climate considerations into their capital and liquidity adequacy assessments, and most have not started developing climate transition plans. While over 40% of firms have started or plan to use scenario analysis to assess climate-related risks, there has been more progress in assessing physical risks compared to transition risks.

The report also revealed that most firms are using a five-year timeline to assess climate-related risks, with life insurers examining risks for longer-term time horizons compared to banks and property and casualty insurers. Despite being in the early stages of climate risk assessments, most firms indicated they are prepared to meet climate-related financial reporting requirements.

To help financial firms improve their capacity to assess climate risks, the regulator has launched several initiatives, including a standardized climate scenario exercise. It also plans to engage with the industry later this year to discuss the results of the readiness survey and monitor evolving practices and standards to determine if additional guidance is needed.  

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