Why should financial institutions assess climate-related risks?

DNHN - According to a report by the CDP Non-Profit, only 20% of financial firms measure their exposure to natural risks, whereas 85% measure their vulnerability to the effects of natural hazards. The climate is changing.

Since the 2015 signing of the Paris Climate Agreement, the banking and financial management industries have been under increasing pressure to evaluate the potential impacts of climate change. A new report condemns the disproportional risk assessment of the majority of financial firms on nature-related issues, which has severe consequences including rising costs, litigation, and reputational harm.

According to a report by the CDP Non-Profit, only 20% of financial firms measure their exposure to natural risks, whereas 85% measure their vulnerability to the effects of natural hazards. The climate is changing. This is a concerning omission that can have severe repercussions for both the financial system and the environment.

This report is based on an analysis of more than 550 banks, insurers, and property owners with a combined $8 trillion in market capitalization. Currently, financial institutions have not made nature a priority, and many of them are still unaware of environmental risks, according to CDP. One of the primary risks is rising costs. BNP Paribas reported to CDP that if banks are linked to deforestation, they could face a potential financial risk of up to 25 percent of their market value due to litigation, reputational damage, and other impacts. In addition to risks associated with financing and underwriting for businesses, financial institutions are also exposed to risks associated with financing and underwriting for other businesses.

The World Economic Forum estimates that the economic value of nature and its ecological services exceed $44 trillion, or more than half of global GDP.

Since the signing of the Paris Climate Agreement, pressure has increased on banks and financial regulators to assess the threat posed by climate change and their contribution to it. However, the researchers warn that the agreement's primary objective - limiting global temperature rise to less than 1.5°C - cannot be attained without protecting and restoring nature. Both terrestrial and marine ecosystems must be preserved, as they contribute significantly to climate control.

However, the financial sector is still insufficiently sensitive to natural risks. 95% of financial companies report that their business strategies and financial plans are "affected" by climate change, but less than a third of them are similarly concerned. Water and forest security.

This demonstrates a lack of sensitivity on the part of the boards: 91 percent of financial institutions that reported to the CDP said they have board-level oversight on climate-related issues, but only 32 percent monitor issues related to forests and water resources.

According to a Jefferies analysis, the financial sector is lagging behind other industries in recognizing and preparing for water scarcity. While the CDP stated that financial firms view the issue as significant, it will not be a priority moving forward.

Nevertheless, there are incentives for change. A recent international agreement on biodiversity, the Paris Agreement on Nature, may persuade investors to take nature-related risks more seriously.

BlackRock, UBS Group, and HSBC Holdings, among others, have backed the "Nature-Related Financial Disclosure Task Force," a framework for organizations to report on and respond to natural risks. Of course.

In addition, CDPs provide examples of what they deem typical. Banco Santander in Brazil, for instance, is monitoring the susceptibility of its customers to water scarcity. The Dutch insurer Aegon expects the businesses in which it invests to assess and manage how their activities may contribute to deforestation and biodiversity loss.

Huyen Tram t/h