Climate risks push banks into a race against their regulators

Big banks know they have limited time to figure out how to account for the growing risk of climate change before the regulators do it for them.

A network of 54 central banks and industry supervisors, formed in 2017, is looking for ways to develop a new framework for climate risk management in the financial sector. Many of the groups members are also on the Basel Committee on Banking Supervision, which sets global capital requirements.

“Corporations can’t wait for regulators to do something. We have to get there first,” said Piyush Agrawal, chief operating officer of Citigroup’s US banking unit.

In their first report last April, central banks recommended regulators monitor climate risks as part of financial-stability assessments and improve data collection and corporate disclosures. While those recommendations are non-binding, other international bodies might move towards new requirements for banks, according to Madelyn Antoncic, a former executive at Lehman Brothers Holdings, who was treasurer of the World Bank from 2011 to 2015.

“The Basel committee could conceivably impose higher risk weightings for loans to companies that harm the environment or give capital relief to banks for green lending,” she said. The US Federal Reserve will probably join the climate risk network soon, said Fed Chairman Jerome Powell.

“The public has every right to expect, and will expect, that we will assure that the financial system is resilient and robust against the risks of climate change,” said Powell.

Antoncic and Agrawal participated in the panel discussion organised by the Global Association of Risk Professionals, a trade group that earlier this month said it would start offering a sustainability and climate risk certificate to industry executives. It would be awarded after specialised training and an exam, just like the groups certificates for financial risk managers and energy risk professionals.

Mispricing risk

Analysis of climate change in the banking industry typically revolves around two main issues: the risk of climate-related disasters causing losses for financial firms, and the difficulty of incorporating environmental concerns into business decisions, such as lending.

“It is all about mispricing of assets and mispricing of investments,” said Ryan Bohn, co-head of America’s climate risk advice at Ernst & Young LLP. “We need to incorporate green issues into these prices.” Several panelists complained that there was not enough data to properly price either. Agrawal said climate predictions vary so widely its impossible to use them in financial risk models. The potential outcomes range from capital being entirely wiped out to no impact on capital at all, he said.

“Rating clients based on their environmental records is likewise tricky, in part because of the green-washing many companies employ,” said Ken Abbott, a former chief risk officer for Barclays’ US unit. “There still are not reliable yardsticks to measure companies or countries green credentials,” he said.

“China is the biggest user of electric cars, but also the biggest producer of electricity from coal,” said Antoncic. And to mine the rare earths to make the electric-car batteries, they are polluting and wasting water terribly. There is too much pretending to be green while polluting the environment out there.

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