Climate change risk management – ​​whose is it anyway?

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Well, the answer is obvious isn’t it – it’s “EVERYONE you would say. Therein lies the difficulty. One of the first lessons of management is to never give a job to “everyone”. because it inherently carries two risks. Either it becomes everyone’s and no one’s business at the same time, leading to an impasse, or the boundaries and gaps between one group and another are so blurred that the ball is likely to fall along the chain. Does this remind us of the story of “everyone, anyone, anyone and no one”? It is however recognized that the management of climate change requires to rightly multiple stakeholders to manage it effectively and efficiently. In a sense, it’s everyone’s job, but with
clear delineation of areas of operation and responsibility for the same.

In this series of blogs, the focus is on the many facets of climate change relevant to the financial services industry, particularly banks. This first one, however, is for context.

Arguably, climate change management is the next frontier with a steep learning curve. As the NGFS (Network for Greening the Financial System) puts it on its scenario portal, “Climate change is one of the
define the challenges of this decade”. What complicates the web is that this is a global issue. The proverbial elephant that the number of six/n blind people (read stakeholders) are trying to understand and address!! A true partnership at all levels, with clearly defined areas of execution and deliverables, is essential. The intention is there, it is the direction and the execution that are worked on.

Both testing and success depend on the ability of stakeholders to defining, accepting and rationally articulating the limits of individual responsibility/responsibility. The next step is to design a practical collaboration model between the participants. The idea is to empower each stakeholder to do well what they do best. Constructive influence on each other is good and desirable, but assuming more ability for themselves or more zeal to “lead” others is counterproductive. Clarity regarding intra-team and inter-team deliverables with a realistic estimate of their circle of influence and a frank acceptance of boundaries is essential for this mammoth project to progress positively.

The good news is that there is a clear movement towards this healthy trend of detailing boundaries. Three examples that I recently encountered give the right signals. The first is a news article with a quote from Federal Reserve Chairman Jerome Powell, which read ”
We have a role to play. It’s narrow, but important”. The second is from Federal Reserve Governor Lael Brainard, who promised that “its climate risk monitoring will NOT include guidelines prohibiting banks from lending to specific industries
like oil and gas. Both healthy tendencies that signal a realistic appreciation of limits as well as limits. I will choose these two themes in the next blog.

The third is a letter from Larry Fink, Chairman and CEO of BlackRock (Larry Fink’s Letter to CEOs 2022) where, while acknowledging that “capitalism has the power to shape society and act as a powerful catalyst of change,
companies cannot do it alone.. they cannot be the “climate police”“, “governments must provide clear pathways and a consistent taxonomy for sustainability policy, regulation and disclosures across all markets.”

There is a lot of good work going on on some of the themes, namely the development of taxonomy, regulatory and disclosure standards in various markets. The case in the pointer in the standard taxonomic space is the EU (European Union)
green taxonomy,
the European Commission states that “the EU taxonomy would provide businesses, investors and policy makers with appropriate definitions for which economic activities can be considered environmentally sustainable”. A second example is the
“Taxonomy of Common Ground – Climate Change Mitigation work of the International Platform on Sustainable Finance (IPSF). In the area of ​​disclosures, the TCFD (Task Force on Financial Disclosures) is leading the way. Success depends on the ability to propose and enforce the execution of a common superset across markets and geographies.

In the next blog, we will examine the interaction of central banks and commercial banks, their planned pathways to reduce climate change risks.

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