Most UK financial services firms admit they are unprepared for climate risk

30 jan 2020

Most UK financial services firms admit they are unprepared for climate risk

Almost 80% of UK firms who responded to our poll say they lack strategies to manage climate risk.

Our poll’s results coincide with an address to over 100 chief executives and senior leaders of banks, insurers, asset managers and other financial services firms by our keynote speaker Sarah Breeden, the Executive Director of the Bank of England heading its work on climate risk.

Sarah Breeden Odgers Berndtson Financial Services Dinner Audience

The Bank is holding a consultation, led by Ms Breeden, to stress-test the approaches firms are taking.

“We’re in a much better place now than we were many years ago, but this, at its heart, is a forward-looking risk,” Ms Breeden said.

“What matters is what is going to happen in the future, and what companies' strategies are to deal with these risks over the next 10 or 20 years – but looking ahead that far, is just hard.”

“Every single asset on the planet will have a different value in a world of net-zero. This affects infrastructure, properties, transport and even agriculture – and so the need to transition creates a very broadly-based risk,” Ms Breeden added.

Behind the Bank of England’s latest consultation is concern that financial institutions are more focused on the current physical risks associated with climate change, like floods and wildfires, than the future “transition” risks, associated with businesses adapting to a zero-carbon world.

This is borne out by Odgers Berndtson’s latest poll asking financial services firms about climate risk.

Transition to a carbon-neutral world

Almost 700 senior executives of financial services firms were asked about their company’s approach to climate risk, the biggest challenges it presents, and what they most need to smooth the transition to a carbon-free world.

Only a fifth (22%) said their company has a well-developed strategy and policies to address both the physical and transition risks from climate change, with roughly the same proportion of firms prioritising just one, and most (45%) considering how to take a more co-ordinated approach.

When it came to the role of central banks, regulators and supervisory authorities, firms clearly agreed (37%) that their most important contribution is to drive accountability at CEO and board level.

This was seen as more important than any other factor, with clarity over standards, shared tools and international cooperation all taking lower priority.

Clear leadership required

Sarah Breeden Odgers Berndtson Financial Services Dinner Speech

“Leaders are really important to this,” Ms Breeden told heads of financial services institutions.

“Business leaders must be very clear that they think this is a risk, make someone accountable for it, incentivise people, for example through remuneration, to do the job well, and provide the resources required to do it. Most importantly, they need to set a strategy - a risk appetite if you like – for how their organisation is going to manage climate risk and monitor progress.”

Cutting carbon is everyone’s job

“To ensure carbon emissions peak and then fall requires the whole organisation to change, and requires a clear intended outcome, a strategy to get there, and the entire organisation working towards it. This isn’t going to be solved by a few people,” she added.

In their responses to the Odgers Berndtson poll, however, senior financial services executives ranked a lack of sustained focus by the top leadership as the number one challenge facing their business on climate risk.

Over 30% of executives ranked this as their company’s top challenge, ahead of inconsistency on international standards (28%) or gathering appropriate data (13%).

It’s been clear for some time to me that the challenges of addressing climate risk and moving to more sustainable business models are a shared endeavour. This is why we have chosen to focus on what that means for financial services firms in terms of finding diverse leaders with the attributes to drive change.

Identifying sustainable leaders

Odgers Berndtson has developed a tailored approach to leadership assessment which allows companies to identify an individual’s ability to drive sustainability as part of their executive decision making.

This model, developed in line with the UN Sustainable Development Goals, can be applied to senior executives across all roles and sectors, including financial services.