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Round two: CFRF guides on climate-related FS risks

Sonia Shah Sonia Shah

The Climate Financial Risk Forum (CFRF) published a second round of guides to help financial services prepare for, and, manage climate-related financial risk. Sonia Shah looks at the key points and what it means for firms. 

The organisation sent out 10 guides on 21 October to support businesses in addressing sustainability as a strategic objective – building on the first guides published in June 2020. These resources focus on risk management, scenario analysis, disclosure, and climate data and metrics, but also touch on the role of the sector in fostering innovation.

The guidance highlights best practices and examples from insurance, asset management, corporate banking, and retail banking. Firms should set aside sufficient resources to fully understand these recommendations and their potential impact. The time for change is now.

Defining your climate-related risk management strategy

Building a climate risk appetite statement (RAS) is a key part of understanding the level and type of risk that firms incorporate into their strategy. One of the CFRF's guides looks at a broad range of example practices from firms, thought leadership, and industry papers.

The CFRF notes that while businesses take different approaches to present climate risk internally, some will look to have an exclusive climate-related strategy. However, the guide recommends that companies integrate their climate risk appetite with existing categories or cross-cutting risks.

A robust RAS should include the impact of climate change on the firm through transition risk, physical risk, and alignment to net zero, a temperature target, or other scientific climate-related objective or strategic goal.

The guide also states that RAS must be integrated into governance frameworks, recommending that firms use a mechanism to ensure there is a holistic view of climate risks – to account for the widespread nature of these issues. The CFRF adds that in the longer term, the more advanced firms will develop a climate RAS that considers insights from scenario analysis and financial and strategic planning.

Firms have access to industry-driven guidance on how to embed risk appetite into risk management processes with specific a guide on RAS use cases. The CFRF also published a document on climate risk training, noting that is it important for firms to embed climate risk into internal company culture through a comprehensive climate risk curriculum.

Firms can take these comprehensive industry learnings and pain points to swiftly expand a risk management strategy that aligns with strategic objectives.

Learnings from the industry in scenario analysis

The scenario analysis implementation guide explains how to gauge climate-related financial risks, which in turn influences a firm’s strategic and commercial decisions. A cross-industry working group provides practical steps on existing industry practices based on the results from the Global Association of Risk Professionals’ (GARP) Climate Risk Management Survey undertaken in Q2 2021.

The guidance details methods to identify sustainability exposure from climate-related risks and assess their financial impact; this is in line with the latest scenarios developed by the Central Banks and Supervisors Network for Greening the Financial System (NGFS). Additionally, the guide shows how businesses can use scenario analysis to measure portfolio alignment with the Paris agreement and to aid portfolio construction.

The CFRF also sent out a spreadsheet that includes a list of climate risk data providers, tools, and methodologies, highlighting the challenge in standardising and strengthening sustainability metrics.

All financial institutions should study these resources to compare how they are assessing risk and meeting goals alongside industry peers.

Closing gaps in disclosure

While many firms recognise the advantages of sustainability-linked reporting, they understand that existing gaps exist in ESG data, internally and externally.

The CFRF guide on managing legal risks in disclosure says that stakeholders must build clarity in disclosure within this growing space, their methodology, and how data is sourced. Financial institutions will also need to articulate the limitations of any data and metrics disclosed. This will help mitigate and manage risks from liability and litigation.

The disclosure case studies guide provides examples from a broad range of organisations, underlining common themes and pain points for firms looking to develop their approaches to climate risk. Organisations must be aware that because of the evolving nature of this space means that these case studies provide only a snapshot of constantly changing practices.

To help in strengthening sustainability-related data, the CFRF also included a climate data and metrics guide. This resource focuses on identifying a common set of core metrics, addressing data gaps, pricing climate risk effectively, and future development of metrics that are forward-looking and financial in nature.

While the CFRF’s guides are useful resources, building a comprehensive climate strategy is far from easy. Financial institutions should recognise the importance of being proactive in this space. To find out how we can help, contact Sonia Shah.


The CFRF resources:

Environmental, social and governance (ESG) Cultivate purpose-driven growth by meeting your ESG goals