As Sustainability and ESG move more and more to centre stage, it’s worth taking a moment to consider what changes are afoot to concern those working Risk functions in any type of financial service organisation.
Central Bank Action
The view on climate risk up to now has been to focus on how long-term changes in climate and physical shifts in environment will pose a threat. A perfect example here being is Insurance companies being encouraged to factor the prospect of future more extreme weather events into their models.
However, the other risk type that needs to be taken into account are transitions risks – that is those due to changes that are already arising from the inevitable and seismic shift to a lower carbon world. Huge changes in government policy or general deterioration in market sentiment towards certain carbon-intensive products or industries are two such examples. Estimates of related ‘stranded assets’ are sizeable and must be factored into risk models now rather than later.
In Ireland, the factors risk professional need to be paying attention to can already be seen at play. In investment management the Central Bank is ensuring via their supervisory structure that prudential risk reporting is reflecting climate issue appropriately. This has led to risk departments needing to overhaul their risk frameworks in this area appropriately. Investment management is not alone in being affected. As mentioned, everything from the design of insurance policies to the granting of credit and much more will be impacted.
Any risk professional who is forward looking to their approach should be increasingly alert with upstream risk monitoring with regard to the current period of substantial change more important than ever. Furthermore, the risk function will need to accept the role of advocate in how they communicate the need for greater awareness and scrutiny of these issues – reflected both in risk frameworks and in each organisation culturally.
With this in mind, the risk function will likely find itself at centre stage.
At FK International we are committed to helping connect finance professionals with this critical agenda. Be part of this next chapter with us.
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