Managing Financial Climate Risk in Banking Services: A Review of Current Practices and the Challenges Ahead

TL;DR

This paper reviews current practices and challenges in managing financial climate risks within banking, emphasizing the need for improved modeling, data, and integration into risk management, especially for smaller banks.

Contribution

It provides a comprehensive review of existing methods, identifies gaps in climate risk assessment, and discusses future challenges in integrating climate risks into banking practices.

Findings

Current climate risk models have limitations in predicting extreme events.

There is a significant gap in detailed databases of exposed assets.

Integrating climate risks into banking requires improved modeling and data collection.

Abstract

The document discusses the financial climate risk in the context of the banking industry, emphasizing the need for a comprehensive understanding of climate change across different spatial and temporal scales. It highlights the challenges in estimating physical and transition risks, specifically extreme events and limitations of current climate models. The document also reviews current gaps in assessing physical and transition risks, including the development, improvement of modeling frameworks, highlighting the need for detailed databases of exposed physical assets and climatic hazard modeling. It also emphasizes the importance of integrating financial climate risks into financial risk management practices, particularly in smaller banks and lending organizations.