Climate change risks and how to mitigate them

Yes, definitively. Aside from the supervisory expectations and requirements, companies and financial institutions should prepare themselves to withstand the impacts of climate change risks. Simultaneously, they should prioritize informing their employees, clients, and partners about the essential measures required to promote a sustainable and resilient economy. Additionally, they should also integrate these impacts into various aspects of their operations, such as provisioning, insurance policies, product offering, and pricing strategies.

Given the specific nature of climate risks, organizations typically achieve this through what is often referred to as “transmission channels,” representing causal chains linking climate risk drivers to other “classical” risk types, such as credit risk, operational risk, market risk, and others.

For instance, if a company relies on a sub-contractor located in a geographical area that is exposed to an increased risk of natural disasters, its exposure to the risk of operational discontinuity will increase over time if changing climate conditions continue to deteriorate.

As part of its Action Plan on Financing Sustainable Growth, the European Union aims to reorient capital flows toward sustainable investment, in order to achieve sustainable and inclusive growth. As a consequence, financial institutions in general, and banks in particular, will be encouraged to design “sustainable-friendly” products to achieve this objective.

Companies (and individuals) will thus increasingly have access to specific financial solutions and products to anticipate and adapt to climate change. Hence reducing their potential vulnerabilities against climate risks while also actively contributing to the financing of projects and investments that support the green transition.

As a result, we expect an increased wave of financial innovation in this field in the coming years.

The future management of climate change risks introduces many subtle complexities, one of which revolves around the time component associated with climate risk.

In many industries, including banking for instance, business models are usually designed to span over 5-10 years. Profiling the impact of climate change and strategizing for a much longer timeframe, of 15-20 years, poses significant challenges due to high levels of associated uncertainty. Availability of data and predictability of climate scenarios make it difficult to integrate climate considerations in a “classical” business model, just like integration of new technologies and innovative solutions developed to mitigate and address climate change.

Yet, the area of scientific analysis of climate change is progressing extremely fast, with relevant methodologies and data constantly emerging for use in risk management frameworks. We therefore expect companies to gradually enhance their capacity to fully embed climate risks into their risk management practices. 

At Deloitte, we are committed to facilitating solutions to these challenges. Three years ago, we established a collective platform - the MOMENTUM conference – which aims to stimulate active engagement and open dialogue among stakeholders focusing on climate change and environmental risks. By providing a forum, we can help all participants deepen their understanding and develop effective strategies to manage these issues.