Embedding climate risk management within an institution is essential for long-term stability and competitiveness. It strengthens overall resilience, supports compliance with evolving regulations, and helps institutions to identify and capture opportunities arising from the green transition.
Key principles for embedding climate risk management within FIs
| Step | Detailed description | Most relevant stage(s) of maturity | |
|---|---|---|---|
| 1 | Build the data, metrics and methodology | Begin by using existing data sources to map exposures and identify critical data gaps. Develop and refine climate-related key risk indicators (KRIs) that reflect the institution’s portfolio and risk profile. Agree organisational targets to guide resource allocation and ensure data collection and analysis are fit for purpose. Aim to improve the depth, quality, and precision of climate risk data over time. | Discovery, Developing |
| 2 | Integrate climate risk into existing frameworks | Climate risks should be mapped as drivers within existing risk categories: credit, operational, market, liquidity, rather than treated as a separate risk type. This embeds climate risk considerations into core risk management processes and reporting structures, aligning with regulatory expectations and international best practice. | Discovery, Developing |
| 3 | Establish strong oversight and accountability | Boards and senior management must champion climate risk, setting clear accountability, escalation procedures and oversight committees. They should receive regular updates on exposures, breaches and emerging issues. It is important to note that oversight mechanisms should start being defined during step 1. | Discovery, Developing |
| 4 | Systematically identify and assess material risks | FIs should establish processes to identify and assess material climate risks at transaction and portfolio levels. A mix of qualitative and quantitative methods can be used, with approaches refined over time as climate risk maturity develops. | Developing, Embedded |
| 5 | Use forward-looking tools and expand risk assessment time horizons | Given the long-time horizons involved in climate risk, organisations should use forward-looking tools, such as scenario planning and stress testing to assess resilience under different climate futures. Qualitative, high-level assessments should be complemented with targeted, methodologically sound stress tests. Overall, institutions should adopt a long-term and adaptive approach to managing climate risk. | Embedded, Advanced |
| 6 | Embed climate risk into strategy and decision-making | Strengthen organisational capacity to apply climate risk insights in product design, client selection, underwriting and strategic planning. Ensure climate considerations are integrated into business development, capital allocation, and client engagement processes. | Embedded, Advanced |
| 7 | Invest in internal capacity and culture | Promote a strong organisational commitment to climate risk management by investing in training for the board and employees, raising awareness and embedding climate risk as integral to good banking practice. Encourage open dialogue, continuous learning, and the exchange of best practice across teams. | All stages |
Further guidance and case studies for embedding climate risk management within FIs
The UK’s Climate Financial Risk Forum (CFRF) publishes gold-standard guidance for FIs to embed climate risk management practices within their organisations. The World Wildlife Fund (WWF) has catalogued several insightful sustainable finance case studies covering 25 banks across eight sub-Saharan African countries. The Network for Greening the Financial System (NGFS) has reported on developing blended finance solutions for climate mitigation, including details on how FIs in emerging markets can tap into international finance flows.