Banks aim to integrate climate risk into their risk management strategies

In 2021, many businesses around the world were affected by climate change-related weather events: heavy rains in Western Europe, storms and tornadoes in the U.S., and floods in Asia that caused massive property damage and business disruptions and insured losses of over $100 billion.

A woman holding wheat in a wheat crop
January 2022

According to the World Economic Forum's (WEF) Global Risk Report 2022, climate change risk has the potential to overwhelm the global economy and impact financial institutions.

Many banks and financial institutions have become more conservative in assessing credit risks and aim to integrate climate risks into their governance, strategy, and risk management frameworks.

Indeed, climate change presents three major risks to banks:  

  • Physical risk to the loan portfolio resulting from damage or loss caused by weather events such as floods and drought.  
  • Transition risk from changes to a low-carbon (green) economy.  
  • The liability risk that could arise from lawsuits against banks for financing companies whose activities have a negative impact on the environment

Here are some banks that have taken climate risk into consideration and wish to integrate it into their risk management strategy  

  • In Kenya, the Central Bank of Kenya (CBK) has issued guidelines on climate risk management for the banking sector that aims to enable banks to integrate climate risks into their governance, strategy, risk management and disclosure frameworks.  
  • Bank of England: The BoE has sent a letter to bank CEOs to pay particular attention to how they integrate climate-related risks into their business strategies, decision making and risk taking.
  • Bank Al-Maghrib is working to accelerate the consideration of climate change issues within the Moroccan financial ecosystem.In March 2021, it published a directive on the management of financial risks related to climate change and the environment for credit institutions and similar organizations.
"We are currently working with the World Bank on a two-year program that will allow us to map climate risks for the Moroccan banking sector (physical risks and transition risks). This will help the banks since they will have a sectoral vision of the risks borne by BAM, which will constitute an input so that they can apply this analysis to their own portfolios," explains the Director of Banking Supervision

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