Climate change is going to be wide-ranging and have a major impact on financial institutions and their customers. We expect an ESG (Environmental, Social & Governance) lens to have to be applied to activities within the bank, starting with reviewing what has already been lent, and moving quickly to the strategy as to what should be lent in the future and what needs to be exited as soon as possible.
The quality of the portfolio also needs to be looked at in a different light. Agricultural heavy loan books, previously deemed environmentally sound, have now been thrown into the spotlight, as governments are looking at methane produced by cows as one of the major causes of the rise in global temperatures. Whilst the on-going climate focused stress tests are struggling with an array of new data requests (we estimate at least 100+new data sources may be required) to accurately complete the new taxonomies, a number of banks have already identified key issues with their portfolios and have been taking steps to adjust their lending books, by divesting assets.
The Focus For 2022
The Rise In Importance Of Complete And Accurate Disclosures
We expect more focus to now fall on mandatory disclosure. As the legal and regulatory frameworks fall into place, there will be an increasing emphasis on corporates and financial institutions to disclose their climate impacting positions. Within the financial sector we expect a lot more emphasis on SFDR (Sustainable Finance Disclosure Regulation) reporting. We also expect more legal action when organisations do not accurately disclose or chose to not disclose at all.
Data Quality & Making The Findings Meaningful
Financial Institutions are facing a number of challenges in 2022. Whilst the Stress Tests are in full swing, providing accurate and meaningful results remains a challenge, both for the banks and the regulators. For those of us that have battled with large regulatory programs over the past twenty years, memories of ”proxying” values and providing data on a ”best efforts” basis will be revived. The need for standards, both in terms of content, format and from approved sources will become a critical factor in order to make the data provided meaningful and accurate.
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