Working with the financial industry in addressing climate risk

Working with the financial industry in addressing climate risk | Insurance Business America

Working with the financial industry in addressing climate risk

With the effects of the climate crisis pervading almost every area of life today, effort from all sectors is needed to help mitigate the risks caused by climate change. The banking industry is a valuable ally in this fight because it holds a lot of economic power, especially in the area of investments and financing.

In January, the Risk Management Association (RMA) partnered with 19 banks across North America to form the RMA Climate Risk Consortium. This consortium, RMA said, will develop standards for banks to integrate climate risk management throughout their operations, preparing the industry to help economies transition to a low-carbon future.

Some of the banks that have joined the consortium include Bank of America, Royal Bank of Canada, KeyBank, Huntington Bank and Wells Fargo.

“Wells Fargo believes that climate change is one of the most urgent environmental and social issues of our time, and we have committed to integrate climate considerations into the company’s risk management framework,” Price Sloan, head of strategic enterprise risk management at Wells Fargo, said in a statement. “Participation in the consortium with an eye toward developing industry standards for evaluating climate risk will be an invaluable tool for financial institutions like Wells Fargo to accelerate sustainable finance and help deliver a just transition to a low-carbon future.”

RMA said that the Climate Risk Consortium is its latest effort to develop leading practices and standards for banks by fostering industrywide cooperation. The association’s Advanced Operational Risk Group regularly facilitates dialogue with financial services regulatory agencies and shares industry views on advanced operational risk measurement and management, including regulatory frameworks such as CCAR and DFAST. The Securities Lending Group provides products and services to member institutions involved in agent lending functions, while RMA’s Model Validation Consortium provides model validation, peer-sharing, thought leadership, and surveys.

“For over a century, RMA has focused on bringing the industry together to overcome complex problems and difficult times,” said Nancy Foster (pictured above), president and CEO of RMA. “With the world facing the existential challenge of climate change, it’s more important than ever that banks work together on this issue. With their crucial role in the health of economies and communities, banks will help drive the environmental transition to a greener economy, and the RMA Climate Risk Consortium is leading the charge on this defining issue of our time.” 

According to Foster, climate risk management is still in its early days, so financial institutions can benefit from forming a consortium to help them understand how their peers are addressing climate risk and work together to set leading practices to dealing with the risk.

“RMA’s mission with the Climate Risk Consortium is to help create standards that any financial institution could use to formulate their approach,” Foster told Corporate Risk and Insurance. “That will help the industry address climate as a whole, but individual banks still make their own decisions about both their approach to physical and transition risk. Banks do not take any form of ‘pledge’ when joining the consortium as they do with some other alliances on climate change.”

In today’s rapidly changing regulatory landscape, it is important for risk managers to ensure their organizations are abreast with the latest climate and environmental regulations.

Foster said that risk managers can benefit from joining industry groups to hone their knowledge in areas they are not familiar with, such as emerging developments in climate science and associated disciplines.

“There is so much information out there that it’s difficult to take in everything by yourself, especially if you don’t have a team dedicated to climate,” Foster said. “The networking, learning opportunities, and content that come with member organizations expose you to information you might not otherwise easily find and help keep you up to date. At RMA, this includes being able to have discussions with regulators on key topics that are truly for learning purposes on both sides.”