North American banks lag behind European banks in climate risk assessment

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The banking sector is far from having fully implemented new climate risk management tools, with most major regional institutions still in the early stages of carrying out the analyzes that regulators are about to recommend.

That’s according to a new survey, which found that only 12% of North American banks surveyed were already performing so-called “scenario analyses” on climate risk.

More than three-quarters of the banks surveyed are starting to carry out such analyzes or plan to do so soon, according to the survey by consultancy Sia Partners and law firm Cadwalader, Wickersham & Taft.

Many banks are awaiting details from regulators on the types of tests they will have to carry out, according to the survey. Banks also face data hurdles due to significant data gaps around climate-related disclosures.

“Once this infrastructure is developed, I think you’ll see a lot more progress for US banks,” said Brendan Moriarty, senior director at Sia Partners.

Moriarty said European banks are ahead of their US counterparts, thanks in part to a push by continental regulators and industry to develop standardized climate risk data.

The survey, which has been conducted in recent months, drew responses from more than 70 banks and other financial firms around the world. About a quarter of them were US and Canadian banks.

Particularly over the past year, North American financial regulators have braced themselves for climate-related actions. The Bank of Canada released last month results of a pilot program that studied how some financial companies are preparing for different scenarios of climate change.

In the United States, regulators plan to implement scenario analyzes for large banks, with Federal Reserve Chairman Jerome Powell saying during a congressional hearing last month that climate stress scenarios would be probably a “key tool for the future”.

In December, the Office of the Comptroller of the Currency comment requested on “oversight principles” that will help inform how the agency regulates climate risk at banks with more than $100 billion in assets.

The Financial Stability Supervisory Board, an interagency group led by Treasury Secretary Janet Yellen, has stress the need for better data on climate risks and greater coordination between regulators, both in the United States and around the world.

Bankers seem eager for such cross-border efforts, with 95% of survey respondents favoring an international framework to ensure that different countries’ climate finance regulations become less fragmented.

Meanwhile, banks are working to implement recommendations issued by the Task Force on Climate-Related Financial Disclosures, a group created in 2015 by the Financial Stability Board, which makes recommendations on the global financial system. .

Wall Street banks have released reports detailing climate-related risks, as recommended by the task force. And in recent months, select regional banks, including Regions Financial in Birmingham, Alabama, PNC Financial Services Group in Pittsburgh, and Truist Financial in Charlotte, North Carolina, have published their own reports.

Some banks have also started to weigh climate risks in their loans and underwriting documents, according to the survey by Sia Partners and Cadwalader.

About 87% of global banks, a group that includes some U.S.-based firms, consider climate risk in their lending decisions, but less than half of U.S. regional banks do so, the survey found.

Globally-focused banks have evolved faster as they have a greater presence in Europe and the UK, where regulators have been quicker to adopt climate-related rules, said Brandon Sutcliffe, consultant at Ernst & Young.

In a study conducted last year, Ernst & Young and the Risk Management Association found that banks are in the “early stages of integrating climate risk” into their risk appetite frameworks, which they use to determine if they should approve specific loans. About a third of the banks surveyed said they had not started to integrate climate risk into these risk frameworks.

“Completing this work will be critical to truly integrating climate risks into day-to-day decision-making,” says the report from Ernst & Young and the Risk Management Association.

The remaining banks, which have made progress in adding climate risk to their risk appetite frameworks, have primarily focused on physical risks related to climate change, such as the impact of hurricanes and wildfires. forest, according to the report. Physical risks differ from so-called climate change-related transition risks, which include the impact on bank lending if fossil fuel prices fall rapidly.

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