![]() Virtually all stages of the credit lifecycle (figure 1) will likely be impacted by climate risk. Impact of climate risk on the credit lifecycle The steps outlined here can also provide a solid foundation for other enterprisewide climate change strategies and commitments, including reporting progress to regulators, investors, and other stakeholders. It also sheds light on the tools and processes that are becoming increasingly central to these efforts. Since no big journey starts without a roadmap, this report provides just that-a framework that can help banking leaders incorporate climate change considerations throughout the credit lifecycle. ![]() Integrating climate risk metrics into credit risk management could be an enormous undertaking for most banks, but it is a necessary step toward a carbon-neutral future. 3 At the same time, there are also huge opportunities for banks in facilitating the transition to carbon-neutral activities, such as clean energy production and storage, and carbon-capture technologies. This means most banks are likely underestimating their exposure to climate-related risks. These ambitious commitments are essential to limit the rise in global temperatures to 1.5 degrees Celsius by 2050, 2 and avoid the most severe and catastrophic effects of climate change.īy any measure, these commitments should transform how banks finance carbon-intensive businesses and the green economy.Īccording to a recent CDP report, while many banks have identified the effects of climate change on their operations, most have not yet measured the impact on their financing portfolios. One of the major highlights of the recent COP26 climate change conference in Glasgow was the pledge by the Net-Zero Banking Alliance, comprising nearly a hundred banks and representing roughly 40% of global banking assets, to transition greenhouse gas (GHG) emissions “from their lending and investment portfolios to align with pathways to net-zero by 2050 or sooner.” 1 This report offers a roadmap for how banks can embed climate risk into the different stages of the credit lifecycle-including strategy, underwriting, portfolio management, and reporting and disclosure. As a starting point in embedding climate risk into the credit risk lifecycle, banks should reassess their credit business strategies to address climate change issues: the markets, segments, and clients they will serve the products they will offer and the innovations they will bring to the market.Since all stages of the credit lifecycle will likely be impacted by climate risk, integrating climate risk metrics into credit risk management could be an enormous undertaking for most banks, but it is a necessary step towards both effective risk management and a carbon-neutral future.Banks are facing increasing pressure from regulators to manage financial risk related to climate change, with significant credit risk manifesting from the physical and transition risks associated with climate change.The urgent actions banks and their clients take to reach their net-zero commitments will materially transform banks' lending practices. The banking industry is playing a leading role in addressing climate change.Ricardo holds a Master of Sciences degree in Statistics and Financial Engineering from New York University’s Stern School of Business, as well as Professional Risk Manager (PRM), Financial Risk Manager (FRM), and Sustainability and Climate Risk (SCR) certifications awarded by Professional Risk Managers' International Association (PRMIA) and Global Association of Risk Professionals (GARP). He has more than 25 years of experience serving the financial services industry and clients in Latin America, the United States, and Europe. ![]() This role is a natural extension to his focus on large and complex industry transformations that requires a combination of risk, compliance, analytics, technology, and business understanding. Ricardo helps financial institutions navigate complex and evolving Environmental, Social, and Governance (ESG) expectations and regulations. He serves as a Sustainability and Climate Risk Leader for Deloitte in the US. Ricardo is a principal in Deloitte & Touche LLP’s Risk & Financial Advisory practice. ![]() Principal | Deloitte Risk & Financial Advisory ![]()
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