Navigating Climate Risk Management: Developing Innovative Solutions for Banks and other Lenders

As per the IPCC's 6th Assessment, climate changes are expected to intensify in all regions worldwide in the upcoming decade. Regulatory scrutiny and disclosure requirements are growing, and financial institutions, including banks and lenders, are facing greater pressure to manage these risks effectively. To meet this challenge, actuaries can play a critical role in developing new solutions that help institutions navigate this rapidly evolving landscape.

Our presentation provides an overview of the climate risk management strategies adopted by banks and other lenders, along with the challenges they may face in the future. Firstly, we will discuss the various techniques employed by lenders to avoid, minimize, mitigate, and transfer climate-related risks within their lending portfolios. Secondly, we will examine the evolving dynamics of managing physical and transition risks using separate instruments. Finally, we will highlight some of the potential limitations of current methods used by banks and lenders in quantifying and comprehending these risks, asset-liability matching and accessing affordable risk transfer options.

As standards, frameworks, regulations, and disclosures related to climate change continue to evolve, banks and other lenders must find new ways to effectively manage related risks. Our focus is on how actuaries can play a pivotal role in untangling the complexity of these risks. Our goal is to highlight the new opportunities for actuaries to expand their traditional roles and provide comprehensive assistance to lenders as they strive to create innovative solutions.

Secondly, we reflect on climate risk management from a portfolio perspective expanding current techniques and frameworks in relation to existing and upcoming regulations, with a specific focus on portfolio mitigation against climate risks. Due to the complexity of climate risks, their interaction with adaptation and transition, and the resulting second order impacts, actuaries can no longer consider risks independently and rely merely on extrapolation, but a more dynamic approach is required. Moreover, as global regulations and disclosures are changing and evolving in light of climate risk, financial institutions will need to consider and prepare for these changes.

Finally, we apply these considerations to a case study.

Find the Q&A here: Q&A on 'The Mangement and Cost of Climate Change'