Foundations

The report introduces the practical and theoretical underpinnings of environmental risk analysis by providing a definition of the concept and highlighting its strategic significance. Environmental risk analysis refers to the process used by financial institutions to incorporate environmental risks into their risk management and decision-making processes. By doing so, institutions can better surface their climate-related exposures and align portfolios with sustainability and social objectives.

Lessons

By analysing case studies from Brazil, China, Germany, India, Italy, the Netherlands, South Africa, Switzerland, the United Arab Emirates, the United Kingdom, and the United States, the report identifies ways in which financial institutions can improve their engagement with environmental risks.

Cross-cutting lessons

The report concludes that innovative practices have started to emerge across geographies and sectors. While local variations may arise from differing national legal, market, and environmental contexts, a broad range of financial institutions are demonstrating meaningful engagement with environmental risks.

Sectoral lessons

The report identifies specific sectoral lessons. Real estate is one such sector, particularly in the context of environmental risks related to climate change. Risks may arise from physical causes, such as changes in weather patterns, fires and flooding, as well as from transition risks associated with increasing carbon regulation. The real estate sector is also exposed to potential risks related to building safety, rising energy costs, and changes to the planning system.

Challenges and options

The report identifies the major obstacles to innovative practice adoption by mainstream actors. The authors argue that innovative tools and techniques are needed at every stage of the traditional risk management process. The report highlights the need to focus on building capacity and expertise, ensuring transparency, and improving accountability, as well as recommending an enhanced regulatory system to support sustainable financial systems. Policymakers should consider the continued development of scenario assessments to better assess the effect of different policy options and promote implementation of new practices. In a nutshell, practitioners should continue to engage their stakeholders and embed environmental risks into mainstream decision-making.

Conclusion

Overall, the report stresses the importance of financial institutions taking environmental risks seriously, and how these risks can affect creditworthiness and the market. As such, it is essential that firms continue to invest in building capacity and expertise in this area. Successful approaches include proactive disclosure of green activities, improvements in the scope and quality of environmental disclosure, and the integration of environmental risk assessment into standard business practices.