Climate Risk Management: A Shifting Landscape for CROs
The responsibility for managing climate risk is increasingly falling to Chief Risk Officers (CROs), yet a clear, organization-wide strategy remains elusive. Recent benchmarking reveals a wide disparity in the size and structure of dedicated climate risk teams, highlighting a challenge in translating awareness into effective action.
The Growing Burden on CROs
CROs are now at the forefront of addressing climate-related financial risks, a complexity layered on top of existing regulatory and performance expectations. This isn’t simply an extension of traditional risk management. it demands a modern understanding of subject matter and a broader perspective encompassing both risk and opportunity. Australia’s financial institutions, for example, are preparing to adopt ISSB climate-related reporting standards, representing a significant shift in risk reporting practices.
Pro Tip: Effective climate risk management requires a ‘two-speed’ approach – maturing investment activities and disclosures while simultaneously building broader enterprise understanding and alignment.
Team Size and Accountability: A Mixed Picture
A recent benchmarking exercise showed a median size of four full-time employees in central climate risk teams, with an average of eight. However, the range varied dramatically, from teams of 50 to those with zero dedicated personnel. Despite this variability, 81% of banks identify the CRO as ultimately accountable for climate risk, suggesting a centralized point of responsibility, even if resources are unevenly distributed.
Regulatory Pressure and Evolving Expectations
Regulators globally are increasing their scrutiny of climate risk management. APRA’s CPG229 and SPG 530 in Australia have elevated climate and sustainability-related risks to the same level as market, liquidity and concentration risk. ASIC is also focusing on preventing greenwashing, demanding greater transparency and accuracy in sustainability-related claims.
Volatility and Shifting Risk Profiles
Beyond climate-specific risks, CROs are navigating broader economic volatility and shifting risk profiles. While climate risk remains a top-three concern for boards and CROs, its perceived importance as a long-term issue has slightly decreased, with 37% of CROs citing environmental risk as a top-five issue for the next three years, compared to 49% last year. This suggests a potential shift in focus towards more immediate concerns, but doesn’t diminish the long-term importance of climate risk.
The Future of Climate Risk Management
Several trends are likely to shape the future of climate risk management:
- Increased Integration: Climate risk will become more fully integrated into existing risk frameworks, rather than being treated as a separate silo.
- Data and Analytics: Sophisticated data analytics and modeling will be crucial for assessing and managing climate-related risks and opportunities.
- Scenario Analysis: Scenario analysis will become a standard practice for understanding the potential impacts of different climate pathways.
- Enhanced Disclosure: Expectations for climate-related disclosures will continue to increase, driven by regulatory requirements and investor demand.
- Cross-Functional Collaboration: Effective climate risk management will require close collaboration between risk, sustainability, and business units.
Frequently Asked Questions
- What is the role of the CRO in climate risk management?
- The CRO is increasingly accountable for overseeing the identification, assessment, and management of climate-related financial risks.
- How are regulators addressing climate risk?
- Regulators are issuing guidance, setting reporting requirements, and increasing scrutiny of sustainability-related claims to ensure robust climate risk management.
- Is climate risk a long-term or short-term concern for CROs?
- While immediate economic concerns may shift focus, climate risk remains a critical long-term issue that requires ongoing attention.
Did you know? Dedicated climate risk teams vary significantly in size, highlighting the early stages of development in this field.
Explore further: Risk.net’s Climate Risk section provides ongoing coverage of this evolving landscape.
