Module 3 – Climate risk governance framework
Climate risk governance embeds climate-related risk thought processes into core decision-making structures and oversight processes. For FIs operating in emerging markets, climate risks are becoming increasingly material and are attracting greater regulatory and stakeholder scrutiny.
For MFIs, climate risk governance presents challenges and opportunities.
- MFIs often work with clients and sectors that are highly exposed and vulnerable to physical climate risk, such as agriculture or localised operations in vulnerable regions. Failing to integrate climate risk into governance can put both clients and the institution at risk. Conversely, effective climate risk management can help build resilience from the ground up in underserved communities.
- MFIs may not have in-house expertise or data for high-level climate risk assessments, but basic measures – such as improving board climate literacy, identifying key climate risks and developing strategies to help clients adapt – can improve the financial resilience of the organisation.
- Boards and senior management should prioritise policies that promote climate-resilient lending, such as flexible repayment terms or insurance linkages. Developing expertise in regional adaptation finance can also give MFIs a competitive edge over larger peers.
Key themes for climate risk governance
A robust climate risk governance framework encourages institutions to examine their approach across four connected areas: risk management, operations, portfolio alignment and disclosures. The guiding questions that follow are designed to help FIs assess how climate considerations are integrated into strategic decisions, operational practices, lending activities and reporting processes.
- Questions to assess climate risk governance
Risk management
- Is climate risk included within the board-approved risk appetite?
- What is the FIs exposure to high carbon-emitting industries/sectors?
- Where are the main concentrations of physical and transition risk within the portfolio?
Operations
- What steps is the organisation taking to decarbonise its own operations?
- Is there internal climate training and capacity building and if so, how advanced is it?
- How are sustainability or climate and nature targets reflected in executive remuneration and other incentives?
Portfolio alignment
- Has the organisation set climate or nature-related targets, and how much progress has been made towards them?
- What proportion of lending or investment supports counterparty decarbonisation efforts?
- What proportion of lending supports counterparty adaptation measures?
Disclosures and regulatory guidance
- How closely are the organisation’s disclosures aligned with regulatory requirements and international standards?
- What share of the loan book recognises best practice criteria, such as Nationally Determined Contributions (NDCs) or national green finance taxonomies?
Supporting elements for climate risk governance
To put climate risk governance into practice, organisations should focus on the following key enablers.
- Board and senior management accountability
- Climate risk oversight should sit with the board, either through a dedicated committee or as a standing item in risk committee agendas.
- The board should review climate risk policies, set a risk appetite, and receive regular updates on exposures, breaches or other emerging issues.
- Integration with existing risk management
- Climate risk should be clearly listed in the FI’s risk register and embedded within the enterprise risk management (ERM) framework.
- Reporting and escalation lines should be well-defined, linking first-line observations to second-line oversight and third-line audit and assurance.
- Roles, responsibilities and the 3 lines of defence
- Assign clear climate risk responsibilities across all levels, from board sponsor to business lines. A RACI matrix (see Rubric 2) to clarify ownership and escalation pathways.
- Competence and capacity building
- Provide climate risk training for the board, risk managers and relevant business lines to build understanding and enable informed decision-making.
- Offer regular refreshers and induction programmes for new staff and board members.
- Policy, risk appetite and incentives
- Develop or update climate risk policies in line with international best practices and disclosure standards (see Module 23), tailored to the institution’s specific context.
- Where appropriate, link climate-related targets to senior management incentives to reinforce accountability.
- Communication, information flows and review
- Conduct regular reviews of climate-related frameworks and policies to reflect regulatory changes, incidents or audit findings, and stakeholder feedback.
- Maintain open communications across the relevant teams within the FI.
- Provide transparent and timely disclosures consistent with international standards and local regulations, where applicable.
- Proportionality and documentation
- Align the complexity of the governance framework sophistication with the institution’s size, structure and regulatory environment, ensuring all roles, processes and escalation criteria are well documented.
Rubric 2: RACI matrix for climate risks
The RACI framework clarifies who is Responsible, Accountable, Consulted and Informed (RACI) for critical climate risk functions such as risk screening, policy development, breach escalation and reporting. The RACI matrix (Rubric 2) shows an example of FI best practice for aligning roles and responsibilities in managing and reporting climate risks.
CLICK TO VIEW RUBRIC 2: RACI MATRIX FOR CLIMATE RISKS