8 THE ARIZONA BANKER Banks must consider the various areas of risk, especially as they consider the safety and soundness of their institution. Climate Change and Climate Risk Management for Banks By Julia A. Gutierrez Climate change and risk management have become hot-button topics for financial institutions in recent years as a result of the rising concern by policymakers, international organizations, financial regulators, and so many others. There has been a big push in recent years for a more environmentally friendly world as we see changes in organizational resources and operations, investor expectations, environmental activists, and even the expectations of the current administration. With all the focus on environmental safety, considering the impacts and learning how to manage the risk is inevitable for financial institutions. What is Climate Change? Climate change is considered to be a change in global or regional climate patterns —more specifically, a change in global or regional climate patterns from the mid-20th century through today. It has been largely attributed to an increase in atmospheric carbon dioxide levels, which are produced by fossil fuel usage. It can be a controversial topic among various groups, but whatever side of the fence you stand on when it comes to climate change, banks face climate-related financial risks and managing that risk can be critical. What Type of Risks Should Financial Institutions Consider? According to the varying regulatory agencies, financial institutions and the overall financial system of the United States are faced with emerging risks, both physical and transition, from contributing factors such as climate change and the transition to a low-carbon economy. The harm to people and property which arises from acute, climate-related events (flooding, hurricanes, heatwaves, etc.) is considered a physical risk. Stresses to financial institutions as a result of the shifts in policy, the adjustments in consumer or business sentiments, or the changes in technology in order to limit the impact of climate change are considered transition risks. In other words, a transition risk is the risk of the transition to a more environmentally friendly process or way of conducting business and operations. Other risks that financial institutions should consider as it relates to climate change and the environment include credit risk, market risk, liquidity risk, operational risk, and reputational risk. Banks must consider the various areas of risk, especially as they consider the safety and soundness of their institution.
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