Navigating Climate Risk by Financial Institutions

On June 25, Mount Consulting and Mount Analytics hosted a third Round Table, on ESG Reporting and Climate Risk Management in our office in Utrecht. In line with our CFO, CRO and CDO focus and the specific expertise of Mount Analytics, this edition’s theme was on the challenges financial institutions currently face embedding climate risk management effectively in their business model. Will financial institutions be able to generate and obtain the right data and design effective methods measuring climate risks?

Key stakeholders – ESG Management as well as Climate Risk Management experts – of ASN Bank, Athora, Ayvens, FMO, Mizuho, Rabobank, Triodos Bank, and Zurich Insurance shared insights and debate best practices positioning and embedding Climate Risk Management in their respective environment. Keynote speaker Jeroen Meerburg, CEO of Rabo Carbon Bank and a series of short, thought-provoking presentations, on the complexity of climate risk assessment, the limited availability and quality of internal as well as (historical) climate data, the incorporation of climate risk into pricing, and effectiveness of capital requirements if any, guided the participants in their discussions on the most challenging subjects.

Top 5 Takeaways:

1. Complexity of Climate Risk Assessment: Although scenario analysis is an effective tool for climate risk assessment, grasping its shortcomings is equally imperative. Key challenges include limited availability of historical climate event data for back-testing, the reliance on assumption-driven climate scenarios and difficulty in modelling behavioural and policy-driven changes, highlighting the need for ongoing data and methodological improvement.
2. Climate Risk Quantification: Climate risk quantification is an important tool to guide strategic decisions and balance sheet adjustments. Incorporating climate risk into pricing may result in a circular dynamic where the inclusion of climate-related risks reshapes portfolios, which in turn reinforces pricing signals. Additive pricing can raise yields and interest rates, potentially devaluing or excluding assets. While granular pricing helps differentiate risk and mitigate adverse selection. However, methodologies are still developing, and outcomes should be treated cautiously to avoid false certainties.
3. Climate Risk Capital: Capital requirements can strengthen the financial system; however, it is dubious whether they will meaningfully change financial behaviour or simply create unintended costs. Uncertainty around data inputs and the right level of granularity further complicates pricing decisions.
4. Regulatory requirements: Regulatory requirements on carbon measurement and disclosures for large corporates create a cascading effect on supply chains. Leveraging market positions, companies compel suppliers to measure and report their carbon emissions. However, the reliability of supplier data remains limited due to measurement challenges and high costs.
5. Effect on consumers: Climate risk quantification and carbon pricing will ultimately affect customers through higher costs of products, financing, and insurance. As these risks are priced into assets and loans, households and businesses will bear more of the costs over time, shaping purchasing and investment decisions.

Interested in the full insights? Let’s connect to discuss how we can simplify and optimize Climate Risk Management in your organization.