Internal buy-in for effective climate risk management

How do you design a purpose-driven climate scenario analysis approach that moves beyond physical risk assessments?

Climate scenario analysis (CSA) is not an isolated exercise; it is part of robust risk management practices. However, it becomes a compliance exercise if the board and management do not buy-in to doing something about the outcomes. Recognising the disconnect between management planning and climate impact timelines is a first step to building consensus and influencing behaviour. This may need the board to revisit how it sets long-term executive remuneration targets.

Regulators and other stakeholders are demanding a deeper understanding of transition risks, and internally, organisations also recognise the need to ensure long-term organisational resilience. CSA provides the forward-looking lens required to meet these expectations, but is powerless without a supportive tone from the top.

When Mark Carney, then Governor of the Bank of England, now Prime Minister of Canada delivered his landmark speech on "the tragedy of the horizon" in 2015, he articulated a profound challenge facing financial institutions: climate change poses risks that will manifest beyond the traditional planning horizons of most actors in the financial system – that means beyond business cycle, the political cycle, credit ratings (three to five years), monetary policy (two to three years) and financial stability ('about a decade'). The impacts of climate change will be felt most acutely beyond those horizons, and yet the actions to mitigate those risks must be taken in the short-term.

A decade later, the Prudential Regulation Authority (PRA) updated the supervisory statement SS5/25, which reflects how this forward-looking imperative has evolved into concrete regulatory expectations. The PRA now requires banks and insurers to demonstrate strategic, comprehensive approaches to managing climate-related financial risks through enhanced governance, risk management frameworks, scenario analysis, and disclosure practices.

However, between regulatory intent and effective implementation lies a critical success factor: internal stakeholder buy-in to this horizon.

Understanding the tragedy of the horizon

The tragedy of the horizon creates a fundamental misalignment. Business leaders naturally focus on annual performance results, whilst climate risks unfold over decades. This temporal disconnect means that by the time climate change becomes a defining issue for financial stability, it may be too late to address it effectively. The solution requires acting now to influence distant outcomes, a paradigm that challenges conventional business thinking.

The case for strategic buy-in

A board plays a key role in setting expectations for climate change financial risk management based on a dialogue with executives that covers both regulatory and commercial aspects. Board education represents a useful way to elevate the quality of the dialogue.   

Securing genuine buy-in from internal stakeholders – from the board to risk managers to front-line staff – determines whether climate risk management becomes embedded in business-as-usual or remains a peripheral compliance activity. Without this foundation, firms risk developing climate strategies that look credible on paper but lack the organisational traction needed for meaningful implementation.

Embedding may also require adjusting executive long-term incentives to have some weighting towards delivering climate action plans or transition plans.

The PRA's expectations under SS5/25 are deliberately proportionate and practical, recognising that firms are at different stages of maturity. Yet proportionality should not be confused with minimalism. Even calibrated approaches require sustained senior management commitment, adequate resourcing, and integration across risk functions. This cannot happen without stakeholders understanding why climate risk management matters to the firm's long-term viability.

Building your narrative

Firms should ask themselves:

• Does our internal narrative on climate change connect back to the tragedy of the horizon?
• Does our organisation understand that we are acting today to address risks that will crystallise beyond our typical planning cycles?

If the answer to these questions is yes, then you are seeing climate change financial risk as a strategic driver of value creation and protection. In this scenario, the engagement with the PRA focuses on specific methodological choices within scenario analysis, data quality improvements, or disclosure enhancements.

Alternatively, if the answer is no – if climate risk is treated merely as another regulatory checklist – the PRA is likely to perceive this and will likely be more sceptical about the firm's efforts and the credibility of its approach. Regulatory engagement becomes more of a ‘cost on business’ and an overall a rear-guard action to keep the regulator at bay.

The journey to implement robust climate risk management capabilities is recognised as long and iterative. Success requires more than technical solutions; it demands organisational conviction that the effort is worthwhile. That conviction starts with buy-in grounded in understanding why we must break the tragedy of the horizon.

How can Crowe help?

There isn’t a one-size-fits-all approach to building a climate risk narrative that addresses the tragedy of the horizon. In our experience, this includes various components such as Board education, reviewing executive remuneration to support a credible tone from the top and strengthening understanding of business dynamics and mitigation options.

For more information, please contact your usual Crowe contact.