Climate risk drives a new paradigm in risk management

Kenneth Wee, Kirill Katsov, Chi Lai, Duncan Martin, James Mackintosh and Zubin Mogul

Risks from climate change have become the main focus in banking and lending. Although improving climate change risk management has a compelling business case, these improvements need to be accelerated if societal goals are to be met. One approach would be to leverage investment institutions’ experience and capabilities in the wider field of non-financial risks (NFRs).¹¹ These non-financial risks are generally not categorised as credit risk, market risk or interest rate risk in the banking book, or liquidity risk, and often include hard-to-quantify risks such as reputational risk, cyber risk and digital disruption risk. This would reinforce developments in risk management to combine existing quantitative approaches with narrative-driven scenario analysis, qualitative assessments of future paths, and greater integration with front-line risk management efforts. There are three areas that will require particular attention: governance, framework and the toolkit.

One particular NFR, pandemics, has of course manifested in a very significant way since 2020, with Covid-19 disrupting economies and lives worldwide. From the perspective of traditional risk management and portfolio