For banks globally, the journey toward sustainability has been influenced by two main factors. First, sustainability is used to gain and maintain a competitive advantage, and second, a unique responsibility borne by banks and other players in the financial services industry focuses on addressing the challenges posed by climate change.
Therefore, for banks, sustainability and business are not mutually exclusive goals but rather complementary towards building an enduring business.
In addressing these dual objectives, banks recognise the need to apply sustainability to catalyse innovation, green finance and renewable energy transition across economies.
Executing and delivering results on these objectives requires a robust understanding and integration of climate-related financial risk management practices into existing risk frameworks.
However, banks face unique challenges when integrating climate-related financial risks.
These challenges range from developing the required competencies and skills for these complex analyses to determining the appropriate level of investment suited to each bank context, to reflecting the impact of long-dated climate risks on short-term decision-making and the lack of data.
To overcome these unique challenges, banks should consider the following. One important but often overlooked aspect is ensuring that climate-related financial risks are integrated into existing risk management processes and frameworks.
It results in a more robust and comprehensive risk management practice at the bank, enabling the identification of climate-related financial risk exposures and their impacts over a specific time horizon.
Climate scenario analysis is an important tool that provides banks with insights to take proactive steps to mitigate losses and develop tailored responses.
Banks need to be proportional in their investment in this area, as this should be motivated by the demand for pertinent analysis that feeds into the decision-making process, rather than as an end in itself.
For example, some banks began with qualitative analysis and have gradually incorporated quantitative analysis as their information requirements evolved with maturity. Banks should also ensure that climate-related financial risks align with an institution's overall strategy.
There should be clarity on the targets applied to measure progress on climate-related opportunities and risks. Finally, for accountability, banks should ensure that roles and responsibilities are defined at the board and management levels.
Banks should also invest in capacity-building and training to empower their teams to fulfil their responsibilities.
Akinyemi Awodumila is a Partner at PwC Kenya. He is an author who writes and speaks widely on corporate reporting topics
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