More than regulatory pressure is driving banks to manage climate risk. Financing a green agenda is also a commercial imperative—but specialized skills are needed to protect balance sheets.
The surface temperature of the Earth has risen at a record pace in recent decades, creating risks to life, ecosystems, and economies. Climate science tells us that further warming is unavoidable over
the next decade, and probably after that as well. In this uncertain environment, banks must act on two fronts: they need both to manage their own financial exposures and to help finance a green agenda, which will be critical to mitigate the impact of global warming. An imperative in both cases is excellent climate-risk management.
The physical risks of climate change are powerful and pervasive. Warming caused by greenhouse gases could damage livability and workability—for example, through a higher probability of lethal heat waves. Global warming will undermine food systems, physical assets, infrastructure, and natural habitats. The risk of a significant drop in grain yields—of
15 percent or more—and damage to capital stock from flooding will double by 2030. In aggregate, we expect that around a third of the planet’s land area will be affected in some way
Furthermore, regulation increasingly requires banks to manage climate risk. Some have made a start, but many must still formulate strategies, build their capabilities, and create risk-management frameworks. The imperative now is to act decisively and with conviction, so effective climate-risk management will be an essential skill set in the years ahead.
This article was originally published on the McKinsey & Company’s website.