Understanding principles for managing climate-related financial risk

• Governance. The board of directors and senior management should have oversight of climate-related financial risks and make sure that they are integrated into the organization’s overall risk management framework.
• Policies, procedures, and limits. The organization should have written policies and procedures for identifying, assessing, and managing climate-related financial risks. These policies and procedures should be tailored to the organization's specific risk profile and should include limits on exposure to certain types of climate-related risks.
• Strategic planning. The organization should consider climate-related financial risks in its strategic planning process. This planning includes identifying opportunities to support customers in transitioning to a low-carbon economy and managing risks to the organization’s own business model.
• Risk management. The organization should integrate climate-related financial risks into its existing risk management processes. This integration includes identifying and assessing climate-related risks, developing and implementing risk mitigation strategies, and monitoring the effectiveness of those strategies.
• Data, risk measurement, and reporting. The organization should collect and maintain data on climate-related financial risks. This data should be used to develop and implement risk management strategies and to report on the organization’s climate-related financial risk exposure.
• Scenario analysis. The organization should conduct a scenario analysis to assess the potential impact of climate-related financial risks on its portfolio. Scenario analysis can help identify and manage risks that might be difficult to quantify using traditional risk measurement methods.

• Establish a robust governance framework by defining clear roles and responsibilities for climate risk management and actively engaging the board of directors and senior management.
• Identify a dedicated cross-functional team that draws key people from departments such as internal audit, legal and risk compliance, information technology, human resources, operations, and investor relations.
• Develop climate-related expertise by providing training and education to staff and all levels of management as well as hiring outside specialists in climate risk management.
• Identify available data, explore how it can be used for climate risk management, and consider how to enhance data collection processes and develop controls over climate-related data.
• Perform a climate risk assessment of the organization’s exposure to climate-related risks, including physical and transition risk, and identify potential opportunities.
• Engage with stakeholders, including investors, customers, regulators, and employees, about climate-related issues.

Though the application of these principles will depend on the size, nature, scope, and risk profile of a specific financial services organization, implementing them in some capacity can strengthen resilience to climate change and help contribute to a more sustainable financial system.