How Banks Can Better Manage Climate-Related Financial Risks

By Maxine Nelson Senior Vice President, GARP Risk Institute

Since GARP’s earliest articles on the topic, we have argued climate risk management should be treated like traditional risk types and embedded into the standard framework of risk identification, measurement, management, and monitoring. A recent UNEP FI publication on managing physical climate-related risks in loan portfolios, part of its Climate Risk Landscape series, is helping risk managers do just that by describing specific responses and actions they can have within the typical risk management framework.

Standard risk management consists of accepting risk, avoiding risk, and mitigating risk. These approaches are applied in the proposed framework (see Figure 1), with mitigation split into two sub-categories: (i) adapt — risk reduction via adaptation of the built environment which increases the resilience of the client and/or their assets, and (ii) transfer — risk reduction via either the bank or its customers transferring the risk to others.