Nearly all the boards of financial institutions surveyed by the Global Association of Risk Professionals have oversight regarding climate risk management, but the tools and data they use to address financial sustainability risk can vary and oftentimes can be enhanced.
The Global Association of Risk Professionals (GARP) and its GARP Risk Institute (GRI) published a report on how boards at banks can address their oversight of sustainability issues for their companies. Developing dashboards with appropriate information is a key tool to aid decision-making over the years. Those information systems will vary by institution, depending on factors like size, location, the type of business it does, and how sophisticated it wants to get in addressing climate-related topics.
The report also says bank boards need to assess the potential risk to different industry sectors, and transactions that could have material exposure to climate risk. Banks also have a range of stakeholders to address sustainability issues with, including supervisors, investors, and governments, which adds to the complexity.
Corporate boards are seen as key to success in sustainability issues, even more so if members have ESG experience. Sustainability data platforms and management systems are also becoming common as businesses tackle different ESG objectives.
GARP says frameworks on sustainability should distinguish between a bank’s own balance sheet and information relating to its business operations. The information can be split into various categories, such as measures to capture the impact of climate risks on its operations, and the impact of its operations on those risks, as well as topics like compliance-related measures.
According to the GARP survey, 92% of respondents said their boards had oversight of climate risks. Leading concerns included climate change, net-zero portfolio alignment, transition risks, and external climate risk disclosures. The survey also found that data on these topics varied significantly across financial firms; additionally, only a small percentage of banks used metrics in any way, and a quarter of the firms didn’t measure climate risk.
The report offers ideas to create an information dashboard regarding a bank’s operations. Some of those include data that show impacts from physical or transition risks, as well as the impact their operations have on climate, especially if there are specific sustainability goals such as emissions reductions.
Additionally, it can show information on the impact of regulatory requirements, and external disclosures, which more stakeholders are holding organizations to. Finally, banks should audit the findings, as bank boards will need to be aware of sustainability-associated risks of the operations.
Some other information can include strategies on how to align their operations with goals, transaction-level assessments for transactions with high risks, ESG action plans, internal carbon pricing, and following global trends. Financial institutions can also create metrics to view the sustainability of their operations, use training programs, and compensate staff based on achieved targets.
As more information improves and becomes more available, banks should continue to populate their dashboards with those metrics, according to the report.
“It is the board’s responsibility to decide how it intends to oversee risk management policies and practices, and a climate dashboard is likely to become an increasingly useful way for the board to discharge this responsibility,” says Jo Paisley, president of GRI.