Frequently asked questions
- How can climate risk management move beyond compliance to become a source of strategic advantage, especially in emerging markets?
Climate risk management directly supports long-term resilience, unlocks new business opportunities, and can strengthen competitive positioning, especially in emerging markets.
Although regulatory demands are rising worldwide, including in many emerging markets, focusing only on compliance risks missing the broader picture. Climate-related events and policy or market shifts can quickly affect loan portfolios, asset quality and reputation. By integrating climate risk into governance, credit approval and portfolio management, FIs can identify vulnerabilities early, take preventive action, and reduce the risk of sudden losses.
Beyond risk reduction, effective climate risk management can drive real business value. Institutions demonstrating climate risk leadership are better positioned to attract international investors and development finance, which increasingly depends on strong environmental credentials. A clear understanding of climate risks also helps FIs identify new markets, such as renewable energy, climate-smart agriculture, or resilient infrastructure. This can open the door to innovative products and services that meet changing client and community needs.
Embedding climate risk management also supports a culture of forward-looking decision-making and adaptability. Adopting a strategic approach through a robust climate risk governance framework (Module 3), setting a clear climate risk appetite (Module 5), and continuously monitoring climate-related exposures (Module 20) can help future-proof operations and support growth. Treating climate risk as a strategic issue is not only prudent but is also good business.
- How can FIs begin managing climate risk management when local data and technical capacity is limited?
Begin with qualitative assessments, use international frameworks and tools, and focus on building foundational awareness and governance.
For many FIs in emerging markets, perfect local data and advanced modelling capabilities is not essential to addressing climate risk. The first step is to establish governance by assigning clear responsibility for climate risk and ensuring senior management engagement. This can be supported by adopting a simple climate risk governance framework (Module 3) and developing a climate risk management policy (Module 4) that acknowledges current limitations while committing to continuous improvement.
On a practical level, FIs can start with qualitative or semi-quantitative approaches such as rapid climate risk screening checklists (Module 6) and sector-based mapping of potential climate risks and opportunities. Global resources such as the Climate Bonds Initiative’s taxonomy, or World Bank climate risk profiles are useful starting points. Many international organisations have compiled country or sector-level risk snapshots, that can introduce climate risk awareness into existing credit and investment decision-making processes without requiring complex new systems.
Climate risk can be embedded across business lines by adding simple climate questions into due diligence templates (see Module 8 and Module 9 for physical and transition risk checklists), and also by training employees and gradually improving data collection. Proportionality is key: start with what is practical, record assumptions and gaps, and show evidence of progress. A step-by-step approach builds credibility and readiness, even where resources are constrained.
- How can FIs identify truly material climate risks and reflect priorities across strategy, risk and day-to-day operations?
Material climate risks can be determined by assessing their exposures through both qualitative and quantitative analysis, then using the results to set clear priorities for strategy, risk management, and frontline processes.
In this context, materiality means identifying those climate-related risks, such as extreme weather, water scarcity, or regulatory changes, that could significantly affect an institution’s financial performance, reputation, or client service. FIs should combine top-down reviews (looking at sectors, geographies, and products most exposed to climate hazards) with bottom-up input from business lines and risk teams. Engaging with client through front-line teams can also reveal which hazards are already being felt, while portfolio data analysis can show how past climate events have already affected financial performance.
The climate risk materiality quantification framework (Module 13) can help to score and prioritise risks based on likelihood, potential impact, and relevance to the business model.
Once material risk priorities are identified, they should be reflected at all organisational levels. At board and senior management level, they should inform strategic planning and climate risk appetite (Module 5). For risk teams, risk priorities should be embedded in policies, risk registers, and limit frameworks. At the operational level, transaction screening (Module 6), due diligence (Module 7, Module 8, Module 9 and Module 10), and credit approval templates (Module 14) should include prompts and thresholds linked to the material risks, ensuring frontline teams address them in day-to-day decisions.
Materiality should be reviewed regularly as market conditions, data, and regulatory expectations evolve. Establish regular feedback loops that draw on portfolio monitoring (Module 20), scenario analysis (Module 21), and client engagement (Module 16) to keep a current understanding of material climate risks and ensure they continue to shape high-level ambition and operational reality.
- What does an effective climate risk appetite statement for FIs in emerging markets look like, and how should it evolve?
An effective climate risk appetite statement clearly defines the types and levels of climate risk the institution is prepared to accept. It should start simply but evolve as understanding, data, and capabilities improve.
At its core, a climate risk appetite statement (Module 5) sets out tolerance for physical risks and transition risks across key business activities. Initial statements can be principle based, for example: “We seek to avoid material exposures to sectors or clients highly vulnerable to climate-related disruption, and aim to increase financing for climate-resilient and low-carbon activities.” At this stage, qualitative thresholds such as “we will not lend to coal-fired power generation” or “we will prioritise adaptation in agriculture lending” provide useful guidance.
Over time, as data improves and experience is gained, the climate risk appetite statement should become more detailed and measurable. This might include setting portfolio limits on high-emissions sectors, defining risk tolerances using scenario outcomes, or linking appetite to targets such as financed emissions or proportion of green lending. It should also align with governance, risk, and credit policies (Module 4), to become embedded in decision-making rather than sitting apart from day-to-day operations.
A climate risk appetite statement should evolve over time. It needs to be regularly reviewed and adjusted in response to changes in external context, such as new regulation, changing physical climate risks, client demand shifts and internal learning. Starting with a simple, practical framework and building in mechanisms for review and revision, can help ensure climate risk appetite remains credible, actionable, and relevant as both risks and opportunities emerge.
- How can FIs make informed climate risk decisions with missing or imperfect data?
Take a principles-based approach by focusing on material risks, using proxy data and expert judgment, and embedding flexibility and transparency into decision-making.
In many emerging markets, detailed climate data or precise emissions figures may not be available. Rather than delaying action, use whatever information is at hand, including sector studies, global or regional risk maps, and local expert input (Module 8 and Module 9). For example, where flood maps are unavailable, national meteorological data or global hazard layers can help identify hotspots. Transition risk can also be assessed by reviewing policy trends and economic reliance on high-carbon sectors.
Expert judgement and established industry frameworks can help fill data gaps (Section 11). This could mean consulting internal and external experts to estimate exposures or using scenario analysis (Module 21) to test portfolio resilience under different futures. The key is to document assumptions, acknowledge uncertainties, and take a precautionary approach where risks are credible but unquantified.
Climate risk assessments are an iterative process. Start with qualitative or semi-quantitative analysis, flag key data gaps, and update assessments as better data becomes available. Transparency about limitations and a focus on gradual improvement can help in making decisions that are both prudent and practical, even where information is incomplete.
- How can governance structures prevent inertia in climate risk management?
Clear governance structures, led by senior leadership and supported by cross-functional coordination, is vital to keep climate risk management active and consistent across an organisation.
Strong senior management and board oversight can ensure climate risk stays on the strategic agenda. Assigning responsibility for climate risk to a senior executive or committee signals commitment and creates accountability. Consider establishing dedicated climate risk or sustainability committees at board or executive level to set targets, monitor progress, and escalate key issues (Module 3).
Successful climate risk management also depends on cross-functional integration. Risk, credit, business lines, legal, compliance, and sustainability teams should all contribute to developing and executing climate-related policies and processes (Module 1). Clear reporting lines and regular communication channels, such as working groups or task forces, help prevent siloed approaches and ensure climate considerations are part of broad day-to-day decisions.
To maintain ownership and coherence, align incentives and embed climate risk responsibilities into job descriptions, appraisal systems, and business plans. Periodic reviews and internal audits can track whether they are being fulfilled and identify emerging gaps or bottlenecks. A robust governance framework (Module 3 and Module 4), setting out clear roles, escalation protocols, and performance indicators, can create a culture of shared responsibility that keeps climate risk management dynamic, integrated, and accountable across the whole organisation.
- How can FIs stay agile in managing climate risk as regulations and market conditions evolve?
FIs can stay agile through continuous learning, structured reviews, and flexible core operations.
Change is the only constant in the climate risk landscape, so institutions should monitor regulatory updates and industry trends systematically. Assigning responsibility (Module 3) to a dedicated climate risk officer or cross-functional working group, ensures that updates from regulators, international bodies, and industry peers are identified early and acted on promptly. Regular briefings for senior management (Module 15 and Module 20) can keep climate issues at the top of the agenda, supporting responsive, rather than reactive, decision-making.
Adaptability requires reviewing and updating internal policies and processes. Scenario analysis and stress testing (Module 21 and Module 22) can help test how an approach would hold up under new rules or market shocks. Feedback from employees and clients should inform how day-to-day practices and longer-term strategies evolve.
Agility also depends on a culture of learning. Regular training, knowledge sharing, and flexible systems can help to strengthen skills and tools as conditions change. Continuous improvement can help institutions seize new opportunities as climate finance markets and regulations develop.
- How can climate risk insights be turned into decisive actions across portfolios, credit cycles, and client engagement?
The best way to turn climate risk insights into concrete actions is to embed them directly into portfolio decisions, credit processes, and client engagement.
In portfolio management, climate risk data – such as exposure to high-risk sectors or geographies – guides allocation, target setting and green investment opportunities. Regular portfolio reviews (Module 20), supported by scenario analysis (Module 21), can identify and act upon emerging risks. For example, if portfolio analysis reveals high exposure to flood risk or policy change, managers can respond by reducing exposure, adjusting pricing, or introducing risk-mitigation measures.
Incorporating climate considerations across the credit cycle is equally important. This involves integrating climate risk checks into due diligence (Module 8, Module 9, Module 10, Module 13) and ongoing monitoring (Module 15, Module 16, Module 17, Module 18). For example, analysts can assess whether a borrower’s business model is resilient to climate transition or physical risks and adjust loan terms accordingly. Where risks are material but manageable, incentivising climate resilience (Module 14) by linking loan terms to climate performance can turn insight into action.
Engaging clients on climate risk is crucial for both risk management and business development (Module 16). Sharing insights helps clients understand their own exposures and support their plans for a lower-carbon or more resilient future. This can include offering advisory services, new financial products, or guidance on sustainable practices. Clear, practical communication is essential for helping clients connect climate risk to their day-to-day decisions.
By weaving climate insights into these core activities, FIs not only protect themselves but also add real value to their clients and stakeholders.
- How can FIs justify the expense of investing in climate risk data, tools and expertise?
Invest in climate risk data, tools, or expertise where they align with strategic needs, existing capabilities, and offer clear added value.
Before committing resources, assess where gaps lie in the climate risk framework (Module 2), for example, limited data coverage, insufficient analytical or modelling capabilities, or gaps in regulatory understanding. External solutions can offer speed, credibility, and technical depth, especially where building in-house expertise would be costly or time-consuming. However, external solutions should complement existing systems (see Module 8, Module 9, Module 10), and integrate smoothly into existing workflows.
Investment decisions should be guided by clear criteria such as; data quality and transparency, portfolio and geographical relevance, flexibility, and provider credibility. For example, data should be clearly sourced, regularly updated, and compatible with regulatory requirements (Module 11). Tools or platforms should be user-friendly, compatible with existing systems, and adaptable as internal ambitions and external standards evolve. When engaging external expertise, it should clearly improve internal capabilities and reflect the institution’s specific needs.
Ultimately, external investment should be justified by its ability to materially improve risk management, regulatory compliance, or strategic positioning on climate. A transparent cost–benefit analysis and clear governance over vendor selection will help deliver measurable value, rather than added complexity. Following external investment principles can accelerate the climate risk journey by filling key gaps and advancing more confident, data-driven decisions across the business.
- How can insights from climate risk assessments and scenario analysis be fed back into ongoing strategy and risk management?
The most practical way to embed lessons from climate scenario analysis, stress tests, and real-world events is through structured feedback that turns insights into policy, process, and portfolio adjustments.
Begin with a formal process for capturing and reviewing findings from each climate scenario exercise or stress test (Module 21 and Module 22). Results should be presented to risk teams, senior management and relevant committees, to reflect on what worked, what was exposed, and what gaps remain (Module 20). Formalising these reviews can help build a culture where learning is expected and valued.
Translating insights into action requires clear governance and accountability. Assigning responsibility for follow-up, such as updating risk appetite statements (Module 5), adjusting lending criteria (Module 14), or refining early warning systems (Module 21), ensures lessons are applied. Reviewing any changes after implementation and assessing effectiveness can help create an ongoing cycle of improvement.
Integrating lessons from real climate-related risk events, such as severe weather impacts on clients or portfolio sectors, can be particularly powerful. Incorporating these outcomes into the climate risk management policy (Module 4) grounds the approach in lived experience, and supports more adaptive management.